Public companies face a critical business decision in determining how much Directors & Officers (D&O) liability coverage to purchase. In order to attract and maintain strong independent board members, companies need to secure adequate D&O coverage while keeping down costs.
Most D&O risk assessments only involve surveying the insurance purchasing habits of major corporations and some also include a review of large past D&O claim losses. Global insurance broker Arthur J. Gallagher & Co. (Gallagher) introduced what it says is a more accurate D&O risk evaluation method, which incorporates statistical modeling with benchmarking and claims reviews.
In a new report, Assessing D&O Risk for Publicly Traded Corporations, Gallagher’s Management Liability Practice showcases the effectiveness of its proprietary D&O Modeling Evaluation (DOME), which it introduced in 1999. For the past 17 years, Gallagher has continuously refined and tested DOME against other evaluation tools and actual client experience to enhance the tool’s accuracy.
“To the potential detriment of directors and officers, assessing D&O risk through benchmarking alone can be flawed. Integrating DOME with traditional benchmarking and claims reviews increases the accuracy of D&O risk evaluations. This approach enables public companies to better protect their balance sheets and the personal net worth of their directors and officers,” says the report’s author, Dr. Phil Norton, who developed the unique risk management tool for Gallagher’s Management Liability Practice and is vice chairman of the Midwest region for Arthur J. Gallagher & Co.
“When we recently retested DOME’s accuracy, we took actual settlements and went back to see what loss costs our model would have predicted before those claims occurred,” he noted. “The correlation between the model results and the actual claim values was approximately 90 percent, thus validating the effectiveness of the model.”
Gallagher’s Management Liability Practice developed DOME by collecting more than a decade of D&O losses, company exposures and trading statistics, and then creating its own proprietary models and algorithms, which rely wholly on client exposure data to project potential liabilities. Projections utilizing the model’s predictive methodology can be made well in advance of potential claims, thus increasing the likelihood that clients will have sufficient coverage limits in place if and when a claim arises.
The report also compares key components of DOME projections with independent results published in D&O studies released by Cornerstone Research and National Economic Research Associates (NERA) in 2016.
Assessing D&O Risk for Publicly Traded Corporations is available for free download on Gallagher’s website at www.ajg.com/assessingdandorisk/.
Source: Arthur J. Gallagher & Co
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