Expert Commentary

Online Underwriting Information for D&O Liability Insurance

The availability of online financial and other important data has made D&O underwriters less dependent on paper submissions, allowing them to make faster, more accurate assessments that ultimately benefit both parties to an insurance transaction. This article reviews some of the sources of this data and how it is used.


Professional, D&O, and Fiduciary Liability
July 2000

During the last several years, insurers have made increasing use of online, Internet-based systems in underwriting D&O coverage. Much of the financial data about an insured or prospective insured that was once contained within applications for coverage can now be obtained directly from the Internet.

Online data is advantageous for underwriters because it is readily accessible, usually more current than that found in a written application, often more detailed, and relatively inexpensive to obtain. The immediate access inherent in such data allows underwriters to make faster decisions-compared to the days when they were completely dependent upon paper applications-as well as more accurate ones when insurers are called upon to evaluate D&O risks.

EDGAR

A number of important underwriting questions can be answered by "EDGAR" (an acronym for "electronic data gathering, analysis, and retrieval"), the Security and Exchange Commission's (SEC's) filings database. Various websites repackage EDGAR to make searching and downloading data easier. In many instances, data filed with the SEC by insureds or prospective insureds is available from EDGAR on the same day it is filed with the SEC. Of course, such information is critical in the D&O decision-making process. Figure A lists various sites that provide data developed from SEC filings.

FIGURE A
WEBSITES PROVIDING SEC FILINGS DATA

EDGAR Database of Corporate Information
The SEC's own filings database.

10K Wizard
A search engine of SEC filings. Also provides free filings alerts and same-day filings.

FreeEDGAR
Same-day filings and filing alerts. Downloads directly into Excel spreadsheets.

EDGAR Online
Free access to filings, but some premium services include a fee.

WORTHNET, Inc.
Zipped EDGAR section compresses filings for fast downloads.


There are a number of important forms filed with the SEC that underwriters are often interested in evaluating. Such forms are listed and described briefly in Figure B.


FIGURE B
KEY FORMS FILED WITH THE SEC

  • 10K.Contains all fiscal-year financial statements and extensive details about the company's operations, including industry background, product backlog, competition, work force, major shareholders, options plans, pending litigation, and the auditor's report. A critical item found within the 10K is Management's Discussion and Analysis of Financial Condition and Results of Operations.
  • 10Q. This form is similar to the 10K but is filed quarterly and provides less detail. It includes quarterly financials and revenue by business segment. However, unlike the 10K, its financial data is not audited.
  • PRE 14A or DEF 14A. These forms are also known as the proxy statement and provide a close look into a company's management. They reveal how much directors and officers earn, including bonuses and stock options. These reports also provide details concerning insiders' side businesses and other financial activities.
  • 8K. This form reports any event that would have a "material" effect on the company's shareholders, such as a change in controlling ownership. It often provides "bad news," such as a filing for bankruptcy, the removal of a top executive, and the resignation of auditors. These forms, which must be filed within 5 days after an event, are especially helpful in tracking smaller, lower-profile companies.
  • S-1. This form is a statement registering an organization with the SEC. It must be filed by firms planning to go public. An S-1 provides financial statements, business strategies, executive rosters, and a market risk assessment.
  • 13D and 13G. These forms must be filed whenever a person acquires more than 5 percent of a company's shares outstanding. The D form is for individuals, and the G form is institutions.

Source: Investor's Business Daily


Watch Lists

A key feature available on most of these sites allows underwriters to create personal "watch lists" of companies. This feature provides online notification immediately after a specific company on their watch list files documents with the SEC. Consequently, underwriters can take immediate action, depending upon the nature of the information received. They can now more easily track the financial fortunes of the insureds comprising their existing books of D&O business and react accordingly. Case in point: An underwriter receives information from an online source that an insured no longer meets the insurer's underwriting criteria (e.g., the insured recently has assumed levels of debt that exceed allowable ratios). Given the insurer's accelerated awareness of this fact, the underwriter can notify the insured that the insurer will not renew its D&O policy-several months earlier than if the insurer were required to wait for a standard paper renewal application. In turn, the insured has additional time to seek a replacement insurer, while the current insurer will be better able to find a replacement to its book of business, given the presumed freeing up of underwriting capacity resulting from the nonrenewal.

D&O application forms and the often-voluminous supporting documents accompanying them probably will not disappear any time soon. Nevertheless, the availability of online financial and other important data has made insurers less dependent upon paper submissions, thereby allowing them to make faster, more accurate underwriting assessments that ultimately benefit both parties to an insurance transaction.


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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