Expert Commentary

2002 D&O Survey Finds D&O Insurance Market Continues To Harden

The 2002 Tillinghast-Towers Perrin survey of 2,275 U.S. and Canadian participants reveals large D&O insurance premium increases and capacity decreases. When searching for the best D&O insurance value for their particular situation during D&O policy renewal negotiations in 2003 or 2004, insureds need to take a long-view perspective, keeping in mind the financial strength and reputation of the D&O insurers with whom they negotiate, and diligently evaluating the amount of coverage limits sought.

Professional, D&O, and Fiduciary Liability
June 2003

Tillinghast-Towers Perrin's newly published 2002 Directors and Officers (D&O) Liability Survey confirms that the widespread and dramatic hardening of the D&O insurance market which began in 2001 continued into 2002. 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 25th 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 2002. For just the second time, survey responses were accepted via the Internet in addition to the traditional written questionnaire; responses were split about evenly between these two methods.

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 2,187 U.S. participants, all major industrial groups were represented. Their median asset size was approximately $30 million and 331 organizations with over $1 billion in assets participated in the survey. The majority (51 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 39 percent experienced merger, acquisition, or divestiture activity during the past 5 years. More than one-quarter of U.S. for-profit survey participants were involved in an initial public offering (IPO) within the past 5 years.

The 88 Canadian survey participants had much in common with—and some differences from—their U.S. counterparts. A wide variety of Canadian industrial groups were represented, with a median asset size of about $1 billion. More than four-fifths (83 percent) of the Canadian for-profit participants were publicly traded corporations. Most (78 percent) of these participants experienced a recent merger, acquisition, or divestiture, and 46 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. Most Canadian respondent companies (51 percent) reported having a subsidiary in the United States.

Market Conditions

D&O insurance purchasers in the United States during 2002 continued to face the largest premium increases since the hard D&O market of the mid-1980s. Coming on the heels of similar increases in 2001, premium increases for generally equivalent coverage averaged more than 29 percent according to the Tillinghast 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 2002 for a significant majority of corporations. For-profit health services companies, merchandisers and durable goods manufacturers, 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. Very large organizations also felt especially severe premium increases in 2002, as underwriters generally exercised caution, with some becoming extremely selective.

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

These premium increases are not entirely unexpected, given the premium and loss trends of the past several years. Five years of significant annual premium decreases in the second half of the 1990s, coupled with the recent alarming rise in the costs of D&O lawsuits (particularly securities litigation) have 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 carriers 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, meant 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 2002. While this trend was already well underway, it gained additional momentum from the widespread concerns about high-profile bankruptcies, corporate scandals, and ensuing corporate governance initiatives.

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

The total amount of coverage offered in 2002 by insurers in the D&O market retreated to its 1998 level, down from the all-time high reported in the 2000 survey. The previous graph illustrates the trend in D&O insurer capacity available to U.S. for-profit companies. 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, 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 in 2002, however, as to which risks qualified for their full limits capacity. This meant that buyers of D&O insurance often found it necessary to purchase smaller layers of insurance from more carriers 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 sectors—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 2003 or 2004. Multiyear policies are 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 insurer to the next. This can certainly have a profound effect on pricing, as well as future claims handling.


Questions, comments, and requests for additional information about Tillinghast- Towers Perrin's 2002 DIrectors and Officers Liability Survey or Seminars on Directors and Officers Liability should be directed to Jim Swanke at (952) 842-5728,

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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