D&O Fix Need To Prevent Further Price Hikes: Insurers
By Lisa S. Howard
International Editor
Given the huge escalation of loss costs in the directors and officers liability market, insurers must find ways to limit their exposures or the market may cease to exist or coverage become too expensive for insurance buyers to afford, according to D&O underwriters.
There is a lot of similarity between the escalation of loss costs in the D&O market and what has been seen in medical malpractice insurance, said Bill Cotter, chief underwriting officer for National Union, the New York City-based subsidiary of American International Group.
If loss-cost escalation continues and underwriters are unable "to fix the economics of our industry, we are going to need significant price increases for at least another one to two years," he said.
During the past five years, there was in excess of a 1,000 percent increase in loss costs, although premium rates during that same period actually fell by more than 50 percent, he said. He noted, further, that an increase of 100 percent across the board was only getting the industry back to its 1996 pricing levels.
Tony Galban, vice president, D&O underwriting manager for Chubb Insurance in Warren, N.J., said premiums are not going up just because "insurers dug themselves a hole."
"We did," he asserted. "The reason they keep going up is because this is a moving target. The defensive cost inflation to these claims is something like Ive never seen before. Its astronomical," Mr. Galban continued.
If things continue the way theyre going, "well probably need 25-35 percent rate increases a year, just to keep up with the lawyers," he said. "Were talking about a very powerful economy here," he said.
"If were unable to make sure the contract provides coverage for the people its meant to provide coverage for, it may not continue to exist as a viable form of protection," said Mr. Cotter.
"In todays environment of increased liabilities against directors, I dont know whats going to happen," Mr. Cotter said.
Citing a study by executive recruiting firm Korn/Ferry International that appeared in the Nov. 2002 edition of Corporate Board Member magazine, Mr. Cotter said 48 percent of directors surveyed said they had turned down a board position because the risk was too great. In addition, 49 percent said a D&O policy was a critical factor in accepting a board position.
"We as an industry, for our long-term health, have to make sure were providing the coverage our customers need," he said. "What were trying to do is to exert responsible leadership to make sure this is a healthy industry that survives for the long term and for the benefit of the people who need the coverage."
Mr. Galban explained that a combination of factors is fueling an almost unstoppable dynamic of inflation on the D&O defense side: unprecedented bad press, corporate scandals, a totally unsympathetic public, an aggressive plaintiffs bar and defendants who are powerful individuals of means that want the best in terms of their defense.
"These guys [the directors and officers] want the best and theres only so much to go around. Lawyers rates are up to $800 an hour. Plaintiffs keep suing and people keep defending, so you have an unbelievable cycle of inflation," Mr. Galban said.
"Why wouldnt the directors and officers all want to have the best for themselves?" he questioned.
Mr. Galban said he has seen some claims where the directors and officers had multiple firms involved. "When you start to talk about these kinds of numbers, defense costs can rise to $15 million to $25 million a year or more."
And, he added, theres nothing now on the horizon to stop it, including tort reform.
"Something has got to give. I cant believe that we can fuel this economy this way indefinitely. Theres never been a better situation for the attorneys involvedboth plaintiff and defendant," he said.
Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.
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