D&O Frequency Down But Severity On The Rise

The frequency of directors & officers claims appears to be trending down, but the severity of those claims is on the rise, said an executive with Aon during a teleconference presentation on the subject.

The executives, speaking during the conference titled "D&O Exposures in a Climate of Increasing Corporate Governance and Litigation," yesterday discussed the current insurance and litigation climate and touched on what risk managers can do to improve their risk profile when buying insurance.

Mike Rice, managing director of Aon Financial Services, said D&O claims have shown declining trends since passage of the Uniform Standards Act in 1998. Between 2002 and 2005, claims have dropped to about 180--similar to the level of the 1990's. Whether the down trend will continue, however, is open to speculation.

The claim drop has not translated into a proportionate drop in severity, Mr. Rice said, noting that the average settlement has risen from about $10 million in the mid-1990s to an average size claim or settlement of $33 million in 2005.

"From a D&O carrier perspective, what this means is that the excess rates they are collecting are not appropriate enough to cover the exposures that carriers are taking on in general," he said.

Mr. Rice noted that frequency seems to be a "positive trend right now, but the severity is a negative trend that keeps increasing, and we don't see any slowdown in the future.

Accounting for the largest severities are technology and communication risks. On a five-year average, 11-to-12 percent of information technology companies will be sued and more than 28 percent of telecommunication companies will be sued, he said.

For Fortune 500 companies, the situation is even tougher because the risks are higher and policyholders can expect some very stringent underwriting for their risks, Mr. Rice observed.

In the D&O market as a whole, he said, there are 825 claims outstanding, with actuarial estimates running between $9 billion and $37 billion. The marketplace premium, however, only stands between $7 billion and $8 billion per year.

While the numbers do not imply that insurers will pick up all of the settlement, said Mr. Rice, if there is $30 billion in settlements and if the industry is responsible for half, $15 billion is still a significant amount of money for a marketplace that is not collecting sufficient premium.

"It is not the healthiest market place," he said. "It is healthier than it was, and a lot of folks have seen rates come down in relation to that, but it is not incredibly healthy."

Of the 40 viable carriers writing D&O insurance today, only 20-to-25 carriers are willing to cover technology and telecommunications risks, said Mr. Rice. Of those, none are rated triple-A by Standard & Poor's.

He said that in the past year there has been no new capacity coming into the market for these risks, which only points to rate increases and coverage restrictions.

He noted, however, that carriers still see D&O as a profitable line. But programs are becoming more restrictive as deductibles increase and limits increase to maintain the premiums. Coverage can be broadened for those who present their risks properly, and carriers are watching these terms closely, Mr. Rice added.

The archived presentation is available at www.aon.com/techseminars. Click on "D&O Exposures in a Climate of Increasing Corporate Governance and Litigation." The presentation will be available for 90 days.