Today “it’s tough to be a director and officer, and that means it’s tough to be a D&O underwriter,” according to Doug Poetzsch, senior vice president, head of specialty claims for Ace USA based in New York. Speaking on a panel at the Professional Liability Underwriting Society (PLUS) D&O West Symposium, held in San Francisco in late September, Poetzsch said today’s news headlines illustrate the challenges directors and officers are facing.
“The news today said Bristol-Myers execs were ousted following a federal investigation, Hewlett-Packard was investigating boardroom leaks, there are potentially changing rules in accounting … these are just some of the examples that are hot today that make it tough to be a D&O today,” Poetzsch said, noting the increase in federal investigations of corporations’ finances and operations.
As further proof of how tough the D&O market is today, David Bradford of Advisen Ltd., also a speaker on the D&O West Symposium’s “State of the Market” panel, noted market trends affecting the D&O industry. Advisen publishes an index that tracks D&O rate levels quarterly. According to that data, Bradford said rate levels are falling, although prices vary by segment. Bradford said D&O rates peaked in the first quarter of 2004 and since then have been “trending downward.”
“Rates have fallen 18 to 19 percent,” he said. Compared to the rest of the insurance market, he said the rates are falling following the same trend.
Generally, Bradford noted, rates have decreased by size of market. “Smaller companies are falling off sharply,” he said. “Middle players are now 30 percent off of where they were two years ago.”
He said the reason for this is capacity and supply. “Capacity is abundant and stable for now,” he explained. “Generally, capacity is increasing with surplus growth. Players and limits offered are relatively stable, but there’s been an apparent shift of capacity to smaller, public, private and nonprofit entities and from excess to primary,” he noted.
Meanwhile, coverage terms are trending broader, Bradford added. “There’s not a wholesale splashing of coverage,” he said.
“When you look at the D&O market, the industry statistics can cause some concern,” said panelist Stephen P. Marohn, regional vice president for American International Group in San Francisco. “Severity of claims has gone up dramatically,” he said. Defense costs [in securities class action lawsuits] have jumped from $9 million just a few years ago to $20 billion, he said. There also have been a number of financial restatements from 2004 to 2006. And as charges against executives increase and settlement values rise, there’s a bigger need for D&O protection, he noted.
Panelist William Hopkins, executive vice president of Starr Excess Liability Insurance Co. Ltd., based in New York, said, “the D&O market is relatively healthy today, but has some aspects that make me nervous.” He noted severability has become a big driver in today’s marketplace. Nevertheless, prices are better today than they were in 1999, he added.
One issue that is complicating the D&O market is the globalization of business, according to panelist Susan Miner, partner at NASDAQ Insurance Agency-Carpenter Moore in San Francisco. “Globalization has increased among clients, even in the middle market space,” she said. “Clients are forming joint ventures, partnering with foreign companies. Brokers [are having to] push the limits of their domestic coverage [to meet new D&O needs],” she said.
Miner said carriers now are introducing global products because they are “not willing to offer local policies as part of a global D&O strategy.” And as companies expand their operations worldwide, that means underwriters and clients themselves need a lot of education, she said.
“They need to know where separation of limits is required, where to pick up EPL (employment practices liability) issues, a lot of education needs to take place,” Miner said.
“This is a trend that’s cutting across other policies as well,” said Carrie Brodzinski, product manager for Beazley in Farmington, Conn., speaking about the trend in globalization.
Marohn agreed, again emphasizing the need for education. If clients are doing business in Brazil or India, for example, they will need local admitted policies and they must be written in local jurisdictions, he said. As globalization continues, companies and underwriters will learn more about what’s required. “This is a process,” he said.
Pointing out another D&O trend, Miner noted that “there is an increased appetite for Side A coverage.” Even in the middle market, directors and officers are concerned about Side A coverage, she said. Among Fortune 2,000 companies, 80 percent to 90 percent of the executives want Side A coverage, she said.
Side A coverage offers protection and broader coverage to company executives for claims in which the company is not permitted or required to provide indemnity, generally providing coverage so that an executive’s personal assets are not exposed.
“Directors and officers have finally woken up to the fact that come hell or high water, it’s a policy designed specifically for them before they have to reach into their own bank accounts,” Hopkins said. In the era of WorldCom and Enron scandals, Side A protection was not widely available, he said. Now, Hopkins noted, there are many Side A products available, and not all policies are the same. Directors and officers need to evaluate whether they want a product that provides coverage for the entire board, just the key executives, or all officers, he said.
Despite all the challenges in underwriting today’s D&O market, Brodzinski said a lot of carriers still want to “play in the space.” Especially in the private, non-public D&O market, “there is a lot more profitability than in the public sector,” she said. “Carriers are trying to distinguish themselves with price, underwriting tougher classes, endorsements, etc.,” in light of more competition and softening trends. Nevertheless, those knowledgeable in the D&O sector can stand out, Brodzinski concluded.
The Professional Liability Underwriting Society (PLUS) D&O West Symposium was held at the Fairmont Hotel in San Francisco on Sept. 12-13. For more information on the symposium as well as future events, visit www.plusweb.org.