RISKVUE ARCHIVE | INDUSTRY WATCH >DIRECTORS & OFFICERS LIABILITY (D&O)

Market Softens While Claim Frequency and Severity Increase

The Tillinghast business of Towers Perrin has published its D&O Liability 2005 Survey on Claims and Insurance Purchasing Trends, a survey of nearly 2,700 private, public, and nonprofit organizations in the U.S. and Canada.

Tillinghast’s report concludes that “the market for D&O liability coverage has continued to soften, while claim frequency and severity have continued to increase.” Here is an overview of the findings.

The D&O Market

The most significant soft market conditions were in the government and other nonprofits business class, followed by merchandising, technology, and transportation & communication classes. Tillinghast attributes the decrease primarily to declining excess premiums.

Some pockets of hard market conditions remain, notably in durable goods, education, health services, and non-banking financial services such as insurance carriers and investment banking.

Carriers and Brokers

In the U.S., the largest shares of D&O primary insurance business are underwritten by Chubb and AIG. Chubb leads in policy count (21%), followed by Admiral and ACE (10% each). AIG leads in premium volume (36%). In Canada, Chubb holds the largest share of the D&O market, with approximately 49% of policies and 52% of premiums.

In the excess layer market, Chubb and XL share the largest market share by policy count and premium volume in the U.S. In Canada, Liberty International and ACE are the largest excess insurers by policy count. AIG, Lloyd’s, and ACE lead the rankings by premium volume.

The leading D&O brokers in the U.S. were ABD Insurance and Financial Services; Woodruff Sawyer & Company; Armfield, Harrison & Thomas; and William Gallagher Associates. Together these brokers held a combined market share of approximately 80% (by policy count). In Canada, Marsh and AON have a combined market share of approximately 60%.

Capacity

D&O insurance carriers provided approximately $1.5 billion in full limits capacity during 2005.

Premiums

Tillinghast’s average D&O premium index decreased 9% in 2005. (It dropped 10% in 2004, the first decline since 1999.) The median premium was at its lowest since 2001.

Thirty-seven percent of participants reported an increase in premium, 37% reported a decrease, and 26% reported no change.

Limits

The average policy limits for U.S. for-profit 2005 survey participants were $14.3 million.

Eighty-two percent of participants reported no change in policy limits at their last renewal. Increases in policy limits were reported more frequently than decreases.

Deductibles/Retentions

Only 29% of U.S. respondents with renewals reported increases in their deductibles/retentions. Overall, 63% of U.S. participants reported no change in their deductibles/retentions.

Claims

Four of five claimant classes reported a decrease in claim payments, but the overall average payment to claimants increased substantially for all participants due to a large increase in the shareholders/investors claimant class.

Claim susceptibility for private companies was measured at 10%, 6% for nonprofit companies, and 35% for public companies. Tillinghast generally attributes the high percentage for public companies to their larger size and to the number of shareholder claims brought against public companies. The survey indicates some correlation between asset size and susceptibility and frequency of claims. Entities with asset value below $100 million reported much lower susceptibility and frequency than larger entities.

Claims against public participants were spread primarily among shareholders (52%) and other third parties (23%). Claims against private companies were spread primarily among employees (25%) and shareholders and other third parties (64%). Most claims against nonprofits were brought by employees (92%).

More than half (56%) of claims remain open. Sixty-six percent of closed claims were closed by settlement, while 10% of claims were closed by litigation.

Board Member Inquiries

About 50% of all public and private companies and 30% of nonprofits received inquiries from their board members about D&O coverage. As a result, 19% of public companies, 5% of private companies, and 2% of nonprofits reported making changes to their D&O coverage.

Predictions

By the end of 2006, Tillinghast expects premium decreases to flatten and the amount of D&O coverage written by insurers to start to decline.

GET MORE INFORMATION

The information contained in this overview was obtained from the executive summary of Tillinghast’s 2005 survey, which you can download at www.towersperrin.com/tp/getwebcachedoc?
webc=TILL/USA/2006/200601/DO_2005_Exec_Sum.pdf

To order the complete D&O Liability 2005 Survey on Claims and Insurance Purchasing Trends ($750 prepaid), contact Mary Maze at 312-201-5598 or mary.maze@towersperrin.com.

riskVue | The webzine for risk management professionals
July 2006