Expert Commentary

1999 D&O Survey Confirms Competition in the D&O Insurance Marketplace

The 1999 Directors and Officers (D&O) Liability Survey confirmed the experience of many insurance and risk management professionals during the past year, finding that the market for this important liability coverage remained competitive for most types of organizations. This article highlights survey findings on the market conditions.


Professional, D&O, and Fiduciary Liability
March 2000

The just-published 1999 Directors and Officers (D&O) Liability Survey confirmed the experience of many insurance and risk management professionals during the past year. The market for this important liability coverage remained competitive for most types of organizations. This article highlights survey findings on the market conditions, and future articles will report on other trends and issues the survey identified.

The survey is a self-selecting, nonprobability sample of D&O liability claims and insurance purchasing patterns. It is the twenty-second such survey in a series and the second produced by Tillinghast-Towers Perrin following its acquisition of Watson Wyatt's Risk & Insurance Services Practice in April 1998. The survey's primary objectives are to help organizations assess probable exposures to claims against their directors and officers and construct appropriate financial protection programs. Nonprofit organizations other than health care and educational institutions are not covered in the 1999 survey. Data for U.S. participants is in U.S. dollars; data for Canadian participants is in Canadian dollars.

The 1999 survey was endorsed by the Research Committee of the Risk and Insurance Management Society (RIMS). In addition to the regular mailing of the questionnaire by Tillinghast-Towers Perrin, the survey package was sent to more than 3,500 RIMS First Deputy members. The assistance provided by RIMS significantly enhanced the value of the survey and helped in obtaining a substantial response of 1,449 participants.

Survey Participants

To put the survey results into perspective, it is helpful to understand the demographics of the respondents. Surveys were mailed to organizations in the United States and Canada.

Among the 1,325 U.S. participants, all major industrial groups were represented. Their median asset size was approximately $150 million, and 375 organizations with more than $1 billion in assets participated in the survey. The majority (56 percent) of U.S. participants were publicly traded corporations. Slightly more than half the participants experienced merger, acquisition, or divestiture activity during the past 5 years, and 49 percent reported an after-tax loss in one or more of the past 5 years. Nearly one-quarter of the survey participants were involved in an initial public offering (IPO) within the past 5 years.

Education has been established as a separate industry group among U.S. participants with the 1999 survey; health care was similarly established with the 1998 survey. Each of these groups contains a significant number of responses from nonprofit organizations.

The 124 Canadian survey participants had much in common with-and some differences from-their U.S. counterparts. A variety of industrial groups were represented, with a median asset size of about $1 billion. Most (69 percent) were publicly traded corporations, and more than two-thirds experienced a recent merger, acquisition, or divestiture. An after-tax loss in one or more of the past 5 years was reported by 49 percent of our Canadian participants, while 23 percent were involved in a recent IPO. Nearly half of the Canadian respondent companies have a subsidiary in the United States.

Market Conditions

The D&O insurance market continued to be competitive for most market segments in 1999. A majority of insurance purchasers responding to our survey paid less on renewal (on a price per million dollars of coverage basis). Competition today involves much more than just pricing; it also involves the quality of the D&O insurance product, as reflected in the breadth of the coverage wording. Note that there is no standard D&O liability insurance policy, as each insurance company uses a unique set of forms that can vary appreciably in coverage. Most purchasers obtained a better D&O insurance product in 1999, as both buyers and insurers continued to pay special attention to coverage wording. In general, we have seen the quality of D&O coverage forms improve consistently since 1990, following a steady stream of new restrictions and exclusions between 1984 and 1990.

The 1999 survey also confirmed some adverse loss trends that suggest tougher times might be ahead for the D&O insurance industry. If current trends continue, or perhaps worsen should Year 2000 computer-related (Y2K) claims materialize, we could soon see adverse loss ratios and shrinking insurer profit margins. Current premium, loss, and coverage trends suggest that corporate insurance purchasers should maintain a longer-term view of appropriate coverage while they seek the best D&O insurance value for their particular situation. As well, they should be mindful of the financial strength and reputation of the D&O insurers with whom they negotiate.

Premium decreases outpaced increases in 1999, and a significant segment of the market increased limits, lowered deductibles, eliminated some exclusions and restrictive endorsements, and otherwise enhanced the wording of their policies. Typical premium decreases for generally equivalent coverage were about 7 percent, according to the average value of our D&O Premium Index.

D&O PREMIUM INDEX - U.S.

D&O Premium Index - U.S.

In 1974, a standardized premium index for D&O liability insurance was developed, establishing an index value of 100 for the average D&O liability premium of a typical respondent in terms of policy limit, corporate reimbursement coverage deductible, and other relevant policy features. In subsequent surveys, we have compared reported premiums to this standard, generating a premium index in much the same way as the Consumer Price Index is developed. The graph above shows the median and average values of the D&O Premium Index.

Softness in pricing did not exist in all segments of the market in 1999. A few industry niches registered more modest decreases or level premiums, and some even reported substantial premium increases. The D&O insurance marketplace was anything but soft in 1999 for a minority of corporations, such as high technology companies, firms involved in recent IPOs, or those exhibiting some degree of financial distress. Consistent with some insurers' new or greater willingness to compete for nonstandard D&O risks, some of these "harder to place" companies were treated less harshly than in previous years. But while insurers recognized that some of these firms are actually good risks, underwriters also continued to exercise caution, with some becoming quite selective.

Most insurance companies have become very sophisticated in assessing and pricing risks. The increased amount of information available and more frequent use of analytical tools have improved the accuracy of such pricing. Accuracy has translated into higher premiums for companies with questionable financial strength, unrealistic stock prices compared to book value, or those operating in a weak economic region or industry. Conversely, relatively lower premiums are charged for top-quality, well-positioned companies.

FULL LIMITS CAPACITY (IN MILLIONS)

Full Limits Capacity (in millions)

The number of insurers in the market and the total amount of coverage offered by these insurers stood at the highest level ever, increasing for the fourteenth consecutive year. We note that any measure of total limits capacity available in the D&O market is bound to be imperfect, due to variations among insurers with respect to market segment preferences and dependence upon coinsurance or reinsurance. Nonetheless, we believe the trend displayed above reflects the general changes in overall D&O market capacity over the period shown.

The "extra capacity" in the market today probably explains the generally soft market; this capacity could be put to greater use in the event of a return to crisis conditions similar to those of the mid-1980s. There is also less dependence now on a small group of reinsurers, as was the case about 15 years ago. Still, cyclical market conditions and the potential for claims related to Y2K exposures suggest purchasers take a longer-term view in 2000 or 2001 D&O policy renewal negotiations. Multiyear policies, when available, merit consideration for many companies, particularly those comfortable with their insurer.

Our next article will highlight some of the claims experience results reported in Tillinghast-Towers Perrin's 1999 Directors and Officers Liability Survey.


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