Small-to-midcap businesses will be prone to rising primary coverage rates in the Directors and Officers (D&O) market in 2013, led by increased litigation and regulatory scrutiny, says Marsh.

A report prepared by Marsh's U.S. Financial and Professional Risks (FINPRO) practice showed renewal rates for overall D&O coverage were flat to slightly up for the fourth quarter of 2012 compared to Q4 2011, and risk-adjusted rates for the primary coverage increased by 4.1 percent.

This was higher than the 3 percent increase for total coverage, which includes all excess layers of a D&O program (A, B and C side coverage). Marsh warned that insureds could see continued firming throughout the year.

Rising litigation and regulatory review by the Department of Justice and Securities and Exchange Commission are key factors in driving the rate increases.

Brenda Shelly, Marsh's U.S. D&O Product Leader said “We are used to looking at filings activity with respect to securities class action lawsuits as part of evaluating overall D&O market trends, but it's important to keep in mind that not only do these statistics not include derivative actions filed at the state level, they also do not account for other relevant current activity, including opt out litigation which is significant and it adds to the complexity and cost of litigation.”

She says that the advent of lawsuits over shareholder objections to Mergers and Acquisitions (M&A), allegations of foreign practices act violations, executive compensation, and say on pay issues as well as those associated with the upcoming JOBS Act, all provide more opportunities for trouble in the D&O space, along with lawmakers calling for increased accountability under Dodd-Frank.

Small-cap companies with $300 million or less in market capitalization are receiving the brunt of this legal activity. These companies saw an 8.7 percent rise in primary and a 9.1 percent increase in total D&O renewals at the end of 2012. Midcap companies between $300 million to $2 billion in market capitalization saw a 4.1 percent increase and 2.7 percent increase in primary and total D&O pricing, respectively.

The largest corporations (capitalized in excess of $10 billion) experienced only a 4.7 percent increase in primary coverage and a mere 0.6 percent hike in total coverage rates, while large-sized corporations saw a drop across primary and total D&O lines.

Rates were possibly easier on the bigger businesses because of increased competition by insurers seeking to spread their risk away from smaller companies beleaguered by M&A lawsuits.

The five industries with the most D&O renewals in Q4 2012 were communications, media and technology (CMT); energy and mining; financial institutions; life sciences; and manufacturing.

Life sciences and CMT experienced the highest increases in risk-adjusted rates for both primary and total D&O programs.

CMT businesses in particular have large global footprints, said Marsh, and are facing high losses and premiums as a result of small-and midcap M&A litigation. The challenge facing the life sciences industry is aggressive enforcement of the FCPA and pursuit of off-label marketing and other violations. In addition, losses for banks and other financial institutions during the credit crisis are still maturing.

Special Reports /

D&O Rates Rising for Small-and-Midcap Businesses: Marsh

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