Guy Carpenter Unveils Model for Analyzing U.S. Publicly Traded D&O Liability Risks

February 12, 2004

In response to insurance companies’ reported need for more effective tools to manage their Directors & Officers Liability Insurance (D&O) portfolios for U.S. publicly traded companies, Guy Carpenter & Company, Inc. announced the launch of the industry’s first model for analyzing and forecasting the frequency and severity of securities class action suits, which account for the majority of D&O insurers’ loss activity.

The new LEAD model (Loss & Exposure Analysis for D&O), developed in conjunction with Marsh & McLennan Companies subsidiary NERA Economic Consulting, is available for the exclusive use of Guy Carpenter clients and uses policy-level data to help insurers determine the loss potential of individual D&O policies as well as portfolios.

“Taking into account the historical difficulties in modeling this line of business, the LEAD model represents a significant step forward in analyzing D&O risks,” said Chip LaLone, principal and head of Guy Carpenter’s worldwide D&O practice. “When used in concert with Guy Carpenter’s MetaRisk model, our clients can better assess the reinsurance options available to them, calculating the tradeoffs between various strategies.”

The MetaRisk model is a proprietary dynamic financial analysis platform, used by Guy Carpenter clients to facilitate their reinsurance decision-making process. The LEAD model brings together a wide range of publicly available data, including stock issuer characteristics, stock trading information, financial statement metrics and stock ownership breakdown, to calculate the likelihood that a portfolio company will face a future securities class action suit, as well as estimate the severity of the class action.

D&O insurers will be able to use the LEAD model as a risk selection/avoidance tool to help analyze and manage shifts in frequency and severity within their portfolios, evaluate risk/reward of different attachment points, and supplement existing D&O reserving methods.

“The LEAD model was engineered through a collaborative effort between Guy Carpenter and NERA that spanned the past 12 months, leveraging our combined in-depth understanding of the D&O market,” said Dr. David Tabak, vice president at NERA. “The result is a highly sophisticated model based on NERA’s proprietary database of securities class actions that can be used to analyze the D&O portfolios of Guy Carpenter’s clients in a uniform way, despite the fact that each is underwritten differently.”

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