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The D&O Market in 2004

After rising sharply during 2001 and 2002, premiums for directors and officers (D&O) liability insurance crested in 2003 and fell throughout 2004. (Exhibit 1) This decline in D&O rate levels occurred despite a growing number of ever-larger claims. Headline-grabbing securities class action suits drove the loss experience for insurers of public companies. New filings increased by 17% over 2003, and the average settlement value has skyrocketed in recent years. Insurers of high excess layers—one of the most competitive segments of the market in 2004—stand to bear the brunt of increasingly common blockbuster settlements.

Almost all sectors of the D&O market saw rates fall in 2004, though the magnitude and timing differed by type and size of company, and industry group. Public companies saw larger decreases in median premium per $1 million of policy limit than non-public companies, and median pricing for large companies (both public and non-public) fell more than for small companies. Among the nine industries analyzed for the study, Building & Construction Materials showed the smallest decrease in median premium per $1 million limit, while Telecommunications experienced the greatest.

Exhibit 1

Overall in 2004, pricing on primary policies fell moderately, lower layer excess pricing was at or slightly above 2003 levels, and upper excess layer pricing plunged. Sharply deteriorating pricing in high excess layers substantially drove down the average total premium paid by large companies. For some high excess layers, 2004 pricing was less than half of 2003 levels. (Exhibit 2)

Exhibit 2

D&O pricing trends were largely consistent with other commercial property & casualty insurance lines. Though varying in degree and timing, pricing in all major lines of business fell in 2004. Rapidly accumulating policyholder surplus—which translates into insurance capacity—reached record levels by the third quarter of 2004, fueling competition.

Overall, both median retentions and median limits of liability rose slightly in 2004, though the magnitude and direction varied substantially by company size and type. Companies with more than $1 billion in revenues were the most aggressive in increasing the amount of D&O insurance they carried, though the sharp increases in average policy limit failed to keep pace with the growth in the average securities class action settlement, the principal source of large claims against these companies.

We estimate accident year 2004 will close with a combined ratio of 101.7% for the D&O line of business, producing approximately a 10% return on allocated surplus. Individual company results will vary significantly. In general, we expect insurers focusing on primary and lower excess layers to outperform insurers of high excess layers.

The study was based on D&O programs for more than 15,000 companies, written or renewed in 2000 through 2004, in Advisen’s Policy Benchmarking System, and on Advisen’s “MASCAD” and Large Loss databases of D&O claims events. Policy information was provided by risk managers and wholesale and retail brokers.

ABOUT THE AUTHOR

This article is excerpted from The D&O Market in 2004 and is reprinted with permission by Advisen. The full text is available to Advisen members or can be purchased by non-members by calling Jeffrey M. Cohen at 212-897-4820. To learn more about Advisen, visit www.advisen.com or call 212-897-4800.

riskVue | The webzine for risk management professionals
April 2005