D&O Hard Market Expected By ?06

D&O Hard Market Expected By ?06

By Mark E. Ruquet

NU Online News Service, Dec. 9, 12:29 p.m. EST?The current soft market in directors and officers insurance is expected to end by 2006, according to a report by Tillinghast.[@@]

The consulting firm, a subsidiary of New York-based professional services firm Towers Perrin, released its findings from a survey of 2,455 companies across 15 business classes. Of that number, 2,409 were from the United States and 46 were from Canada.

According to Tillinghast D&O premium rates have dropped 10 percent from 2003 to 2004, the first decline since 1999. However, claims continue to soar.

The softening is largely due to competition, the consulting firm said. The competition is extremely fierce in excess layers for large public companies, where rates are dropping 10-to-15 percent.

Capacity increased by 11 percent to $1.5 billion in full limits from 2003, and 99 percent of U.S. participants in the survey reported having D&O insurance?a record, said Tillinghast.

Despite this softening, some pockets of hard market remain, primarily in banking, health services, real estate and construction.

"This soft market for D&O insurance will be shorter and less pronounced due to lower investment returns than in the 1980's when cash flow underwriting was prevalent," said Jim Swanke, managing principal for the Strategic Risk Financing Practice at Tillinghast, in a statement.

The survey sought to examine claim trends year over year by questioning 1,347 participants who participated in both the 2003 and 2004 surveys.

In this group, claim frequency increased 11 percent, from .7 per each respondent to .78 per respondent. Claim susceptibility, which is the probability of having one or more claims within the group, increased 6 percent, from 18 percent in 2003 to 19 percent in 2004. The average settlement cost for shareholder claims rose from $10.7 million in 2003 to $11.9 million in 2004, according to Tillinghast.

Elissa Sirovatka, who leads Tillinghast's D&O Liability Survey program, told National Underwriter that the report also illustrates claim increases across various classes of claimants, with some classes experiencing significant increases.

The number of claims still open among the repeat participants increased from 37 percent in 2003 to 56 percent in 2004.

"The continued increase in the average cost to settle D&O claims combined with the significant number of open mega-claims makes a tough case for a sustained soft market," noted Ms. Sirovatka. "The claim conditions we're seeing justify premium increases rather than decreases."