D&O Liability Premiums Fall for Second Straight Year, Tillinghast Survey Says

January 26, 2006

Directors and officers liability insurance average premium index dropped another 9 percent in 2005 after dropping 10 percent in 2004, while half of all public and private companies have received D&O inquiries from their board members, according to the D&O Liability 2005 Survey on Claims and Insurance Purchasing Trends conducted by the Tillinghast business of Towers Perrin.

“The inclusion of directors and officers’ personal assets in the Enron and WorldCom settlements accelerated the number of inquiries from boards,” said Elissa Sirovatka, principal of Tillinghast. “Board members now recognize their accountability and are questioning their own levels of coverage.”

The study also indicated that approximately 30 percent of nonprofit respondents have received similar D&O inquiries from their board. In addition, 19 percent of public companies made changes as a result of inquiries versus just 5 percent of private and 2 percent of nonprofit respondents.

Tillinghast’s survey, which included 2,694 participants, is the 28th in a series of studies on D&O liability claims and insurance purchasing trends and the most in-depth study of its type.

Susceptibility, frequency, severity rise
The study showed that the median premium index reached the lowest point since 2001, while the average premium index has decreased 18 percent from its high of 1,237 in 2003. However, claim susceptibility (the percentage of participants that reported one or more claims), frequency (the average number of claims per participant) and severity continue to rise, much as they did in 2004.

“It’s surprising that premiums have continued to decline while all other factors driving insurers’ D&O costs are on the rise,” said Jim Swanke, Managing Principal for the Strategic Risk Financing Practice. “We see a need for more appropriate pricing of these risks.”

Capacity levels off; restrictions ease

According to this year’s survey, capacity leveled off in 2005, while coverage restrictions continued to ease. Consistent with last year, D&O insurance carriers provided approximately $1.5 billion in full limits capacity during 2005, while 99 percent of U.S. participants reported having D&O insurance. By the end of 2006, premium decreases are expected to flatten, and the amount of D&O coverage insurers write will start to decline, according to Sirovatka.

Similar to 2004, competition remains fierce in excess layers for large public companies, where premiums for repeat participants dropped 10 percent in the excess layer and 8 percent in the primary layer. For repeat participants, the increase in average total policy limits was 9 percent, while the increase in average primary limits and average excess limits for this group was 2 percent and 11 percent, respectively, between 2004 and 2005.

“Not surprisingly, the largest increase in limits was in the excess layer,” said Michael Turk, Senior Consultant. “However, premium decreases of a similar magnitude were reported in both the primary and excess layers. Given the increase in excess limits and increasing claim severity, it seems counterintuitive that there is a decrease in the excess layer premium.”

The most significant soft market conditions were observed in the government and other nonprofits business class, followed by merchandising, technology, and transportation and communication classes. Decreases are primarily driven by declining excess premiums, according to Tillinghast. Some pockets of hard market conditions remain, notably in durable goods, education, health services and non-banking financial services (e.g., insurance carriers and investment banking).

Among 2003 to 2005 repeat participants, claim frequency increased 30 percent from 2004 to 2005 and claim susceptibility increased six percentage points. The average claim payment decreased for four of the five claimant classes reviewed in the survey (employees, competitors, customers and clients and other third parties), but increased for the claimant class with the highest average severity (shareholders). The claimant distribution continues to be heavily dependent on the ownership structure of U.S. survey participants. For example, 52 percent of the claims against public participants were brought by shareholders. In contrast, 92 percent of the claims brought against nonprofit participants were brought by employees. Claims against private participants were spread primarily among shareholders, employees and other third parties.

More than half (56 percent) of claims against 2005 participants are still open, which is unchanged from last year’s survey. The large majority of the U.S. closed claims were closed by settlement (66 percent), while the percentage of claims closed by litigation decreased from 20 percent in 2004 to 10 percent this year.

Other highlights of the survey include:

* Low Susceptibility in Nonprofits – Nonprofit and private companies show very low susceptibility and high claim frequency. “This combination indicates that if a nonprofit or private company has claims, they tend to have many claims,” said Sirovatka. The susceptibility (6 percent) reported by the nonprofit participants in 2005 is relatively unchanged from the susceptibility (5 percent) reported in the 2004 survey.

* Deductibles/Retentions Remain Unchanged – Only 29 percent of U.S. respondents with renewals since the second half of 2004 reported increases in their deductibles/retentions, according to the survey. Overall, 63 percent of U.S. participants reported no change in their deductibles/retentions, compared with 65 percent in 2004. The average policy limits for U.S. for-profit 2005 survey participants were $14.3 million compared to $13.6 million in 2004. In 2005, 25 percent of U.S. participants reported increased enhancements (up from 13 percent in 2004 and 5 percent in 2003) while 10 percent reported decreasing exclusions.

Reinsurance implications
“The reinsurance D&O marketplace remained hard in 2005, which is expected generally to continue into 2006,” according to Michael Hollenbach, Professional Liability Practice Leader at the Reinsurance business of Towers Perrin. “This is particularly true for the riskiest parts of the market, such as large cap public companies. Interest in smaller private and not-for-profit risks is much higher, and some relief for that segment may be forthcoming.”

“Pricing for excess layers has decreased at a faster clip than the overall market,” he added, “so we expect that factor to have a negative impact on these layers typically assumed by reinsurers.”

Participant profile
The 2,694 companies surveyed included 2,645 from the U.S. and 49 from Canada, in 15 business classes across all major industry groups. In the U.S., participants in technology, governmental and other nonprofit, and biotechnology and pharmaceuticals represented 64 percent of the U.S. respondents. The distribution of participants by assets and revenues remained consistent with the 2004 survey. More than 70 percent of the participants in both surveys reported assets less than $50 million. In 2005, 29 percent of U.S. participants are publicly-held organizations, 51 percent are privately held and 20 percent are nonprofit, which is consistent with the 2004 survey.

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