Better Terms, Competition Creeping Into D&O MarketEven On Severability

Severability provisions preserve coverage for innocent insureds in situations where other insureds have misrepresented material information in a policy application or committed wrongful acts that would otherwise eliminate coverage.

"Severability, as an issue, has been around for quite a while," said Steve Shappell, director of financial services group, legal for Chicago-based Aon. "There was not much done about it until a year or two ago when there was an explosion in the severity of claims."

"There is no doubt that carriers are seeking to narrow the terms of severability in a contract," said Don Bailey, global practice leader for Willis Executive Risks in New York. "It has become a negotiated item on every contract we have," he said.

But Lou Ann Layton, managing director and D&O practice leader for New York-based Marsh, offered a different view. "Carriers," she said, are not narrowing the terms of severability, but are instead "granting a greater amount of severability."

"It all has to do with competition," she said.

Mr. Shappell said that while brokers struggle with carriers over policy language related to the severability issue, carriers are giving it, provided they get the right terms and rate. "Its not impossible to get [severability]. And we are getting it often, but there is a lot of work involved," he said.

"Underwriting is more intense now" in the D&O market than it has been at any time "in the last 12 years," noted Mr. Bailey. "There is a lot of work and a huge request for information."

Mr. Bailey said that no matter what the terms are, dishonesty still voids a contract.

"A lot of insureds and brokers had been given very broad terms in the past, but without a non-rescindable contract it does not matter what kind of [terms] one has," he said. The insured "can have the very best, in the broadest terms, but at the end of the day, if the insuredconducts egregious acts, the carrier can sever."

Ms. Layton observed that despite the hard market, there are more markets opening for D&O coverage than in the past. That, in turn, means an increasing willingness of insurers to include severability in their coverage.

She reported that the terms have become less restrictive within the past 30-to-60 days. But carriers are still very careful in their underwriting, she said, adding that "not every client is eligible for better terms."

Mr. Bailey said there are more carriers, primarily in the excess market, than in the past. He also noted that in the primary market, where before it was primarily AIG and Chubb, others who were players in the excess market for D&O are now entering the primary market.

"There is more capacity in the D&O market than ever. There are some U.S. based start-ups and some Bermuda capacity. There is capacity in the marketplace now that approaches $2 billion, and we have never seen that much."

Nancy Cerino, vice president of Partners Specialty Group, a wholesale brokerage firm based in Noristown, Pa., noted that she hasnt experienced any problems finding carriers to write D&O insurance. If the risk has "a good track record, anyone is willing to produce a quote. But when it is a bad risk, it is bad to all," she said.

Despite the competition, the desire to see insureds have a greater stake in the risk–more skin in the game–through retentions and reinsurance is common.

The desire for this, said Mr. Shappell, stems from the rising cost of securities litigation settlements.

A PricewaterhouseCoopers report this year showed that the average settlement in 2002 was $19.9 million, up 12 percent from the average settlement in 2001 and up 40 percent from the average values of 1996 to 2001 (NU Online News Service, Aug. 26, 2003).

Mr. Shappell said the drivers of the hard market gave insurers the basis to insist on higher retentions, adding that the carriers believed that giving added responsibility to the insureds would produce better results in litigation.

"Carriers felt that insureds did not have the same fight in them when retentions were lower," he explained. "I do not see any evidence of that being true, but carriers feel there is a better partnership with the insureds" when retentions are higher.

Mr. Bailey said retentions have gone up from the $250,000-to-$500,000 range for medium and large-sized companies to a current minimum of between $1 million to as much as $25 million for larger public companies. And it is a figure, he said, every insurer insists upon getting into every renewal.

"Most clients understand the economics of the situation," said Mr. Shappell. "But at the same time they are shocked by some of the increases they have seen over the last two years."

The increases are easing up, however, he suggested. Echoing the other brokers, he said "the market is flattening out tremendously."

"Carriers, I feel, got a lot of the big increases that they wanted to over the last two years. So we are seeing flat renewals up to 15-to-20 percent. But it is possible to get flat renewals if you go in there and convince carriers they have already gotten the right numbers."

He added however, that it is not true across the board, but depends upon individual carrier appetites for risk.

"I think we will continue to see flat-to- moderate increases in premiums and, as far as terms and conditions, I dont see any additional tightening going on," Mr. Shapell said, adding that he feels carriers are pricing for events similar to Enron or Tyco in the future.

"There is no loss development that suggests that rates should be flattening or rates should be coming down in certain sectors, but that is the case," Mr. Bailey commented.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 5, 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.