Expert Commentary

2001 D&O Survey Finds Real Premium Increases Average 29% for D&O Insurance

Mark Larsen discusses the 2001 Directors and Officers (D&O) Liability Survey published by Tillinghast-Towers Perin, highlighting current market conditions. Future articles will report on other trends and issues the survey identified.


Professional, D&O, and Fiduciary Liability
June 2002

Tillinghast-Towers Perrin's newly published 2001 Directors and Officers (D&O) Liability Survey confirms that the premium increases experienced by some portions of the directors and officers (D&O) insurance market beginning in 2000 became widespread and dramatic during 2001. This article highlights survey findings on D&O insurance 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-fourth in a series of such surveys, and covers for-profit companies and nonprofit organizations in the United States and Canada. The primary objectives of the survey are to help organizations assess probable exposures to claims against their directors and officers and construct appropriate financial protection programs.

Survey participants submitted data during the second half of 2001. For the first time, survey responses were accepted via the Internet in addition to the traditional written questionnaire; responses were split about evenly between these two methods. Questions, comments, and requests for additional information about Tillinghast-Towers Perrin's 2001 Directors and Officers Liability Survey or our Seminars on Directors and Officers Liability should be directed to Mark Larsen at (312) 609–9289 or .

Survey Participants

To put the survey results in perspective, it is helpful to understand the demographics of the respondents. Data for U.S. participants is in U.S. dollars, and in Canadian dollars for Canadian participants.

Among the 2,037 U.S. participants, all major industrial groups were represented. Their median asset size was approximately $50 million and 330 organizations with over $1 billion in assets participated in the survey. The majority (55 percent) of U.S. for-profit participants were publicly traded corporations. About five-eighths (62 percent) of these participants reported an after-tax loss in one or more of the past 5 years, and 43 percent experienced merger, acquisition or divestiture activity during the past 5 years. Nearly one-third of U.S. for-profit survey participants were involved in an initial public offering (IPO) within the past 5 years.

Biotechnology & Pharmaceuticals was established as a separate industry group among U.S. participants with the 2000 Survey. This industry group includes biotechnology and health product companies formerly included in the Technology group, as well as drug companies formerly included in Nondurable Goods Manufacturing. Government & Other Nonprofit was also established as a separate industry group among U.S. participants with the 2000 Survey. Education was similarly established in 1999, as was Health Services in 1998. Note that the Education and Health Services groups each contain a significant majority of responses from nonprofit organizations.

The 93 Canadian survey participants had much in common with—and some differences from—their U.S. counterparts. A wide variety of industrial groups were represented, with a median asset size of about $500 million. More than four-fifths (82 percent) of the Canadian for-profit participants were publicly traded corporations. Most (63 percent) of these participants experienced a recent merger, acquisition, or divestiture, and 44 percent reported an after-tax loss in one or more of the past 5 years. More than one-fifth of Canadian for-profit survey participants were involved in a recent IPO. More than half (58 percent) of Canadian respondent companies reported having a subsidiary in the United States.

Market Conditions

D&O insurance purchasers in the U.S during 2001 faced the largest premium increases since the hard D&O market of the mid-1980s, as nearly all segments saw sharp increases in premiums coupled with more stringent underwriting. Premium increases for generally equivalent coverage averaged nearly 29 percent according to our D&O Premium Index. A few industry niches registered level premiums or only modest increases, but the D&O insurance marketplace was anything but soft in 2001 for a significant majority of corporations.

Technology and biotechnology companies, firms involved in a recent IPO or those exhibiting some degree of financial distress are just a few examples of the groups that experienced very large increases in the cost of their D&O insurance coverage. Although insurers recognized that some of these firms are actually good risks, underwriters generally exercised caution, with some becoming extremely selective.

D&O PREMIUM INDEX - U.S., FOR-PROFIT ONLYD&O Premium Index - U.S., For-Profit Only Graph

These premium increases are not entirely unexpected, given the premium and loss trends of the past several years. More than five years of significant annual premium decreases, coupled with the recent alarming rise in the costs of D&O lawsuits (particularly securities litigation) have all meant that many insurers experienced adverse loss ratios and saw profits turn to losses on this line of business. These loss trends are likely to continue, especially when potential costs associated with the large number of so-called "IPO laddering" lawsuits outstanding are considered.

Other factors have also contributed to or exacerbated recent increases in D&O insurance costs. Many D&O insurers reinsure a significant portion of the coverage they provide. Substantially more expensive reinsurance for many commercial insurance lines following the events of September 11, 2001, mean that these D&O insurers have had another important reason to seek premium increases. As noted, the underwriting of D&O insurance became more stringent as well in 2001. While this trend was already well underway, it gained additional momentum from the widespread concerns about high-profile bankruptcies and the quality of corporate accounting and financial reporting practices.

FULL LIMITS CAPACITY (IN MILLIONS) - U.S., FOR-PROFIT ONLYFull Limits Capacity (in millions) - U.S., For-Profit Only Graph

The total amount of coverage offered in 2001 by insurers in the D&O market stood near its highest level ever, down very slightly from the all-time high reported in our 2000 Survey. The previous graph illustrates the trend in D&O insurer capacity available to U.S. for-profit companies. 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 on coinsurance or reinsurance. Nonetheless, we believe the trend is an informative portrayal of general changes in the overall D&O market capacity over the period shown.

Many D&O insurers were increasingly selective, however, as to which risks qualified for their full limits capacity in 2001. This meant that buyers of D&O insurance often found it necessary to purchase smaller layers of insurance from more insurers or employ quota share arrangements to obtain the limits they sought.

The high capacity levels were a major factor contributing to the generally soft D&O insurance market that existed prior to 2000. Continued presence of this capacity suggests that the firming of the D&O market—even the sharp increase seen by some sector—does not signal a return to crisis conditions similar to those of the mid-1980s. There is also less dependence on a small group of reinsurers now than was the case during that hard market.

Market conditions indicate that purchasers should take a longer-term view of appropriate coverage while they seek the best D&O insurance value for their particular situation during D&O policy renewal negotiations in 2002 or 2003. Multiyear policies may be generally unavailable for now, but purchasers should still be mindful of the financial strength and reputation of the D&O insurers with whom they negotiate, as well as diligently evaluating the amount of coverage limits they purchase. Note as well that the quality of coverage based on the wording of the individual D&O contract between insured and insurer can actually be substantially different from one case to the next. This can certainly have a profound effect on pricing, as well as future claims handling.

Our next article will highlight some of the claims experience results reported in Tillinghast-Towers Perrin's 2001 Directors and Officers Liability Survey.


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