Willis Study Finds DO Market in Disarray

March 14, 2002

Global insurance broker Willis Group Holdings Limited has issued its assessment of the Directors and Officers Liability Insurance (D&O) market, and concludes that it “is in considerable disarray, with insurance carriers attempting to recoup yesterday’s losses as soon as possible, even as today’s losses continue to mount.”

“The results are sharply rising prices, changes in terms of coverage, and contraction in limits offered, said Willis’ announcement.” The D&O market has also been adversely affected by economic uncertainty, an increasing lack of reinsurance support and a significant upswing in claims activity.”

The report continues that although the events of Sept. 11 haven’t resulted in an upsurge of D&O claims, “those events have adversely affected the availability, pricing and terms of D&O coverage.” It pointed out that “In the past, parent company reserves bolstered the ability of the D&O insurers to offer favorable coverage terms that were not reflective of the loss ratios of the D&O book of business,” but that these reserves are “now being redirected to address the financial impact of September 11 in other unrelated lines of insurance. The bottom line for D&O carriers is that their reserve cushion is gone.”

Willis listed the following as being the principle concerns relating to D&O coverage:
— Increase in frequency of claims
— Increase in severity of claims
— No benefit to insurers for successful defenses (“wins”) due to retention waivers –Little benefit to insurers for claims that could be settled but for refusal of the insureds (under the modified or deleted “hammer clause”)
— Little or no insured participation in claims payments due to low retentions and broad grants of coverage
— Insufficient premium to pay for losses Departure of reinsurance support.

As a result of the problems Willis foresees large premium increases. Healthy companies with favorable claims experience can expect to pay around 35 percent more, but companies with greater risk exposures, calculated by their size and the industries they’re in, are looking at increases of 50 percent or more. Willis warned that, “For financially stressed companies, premium increases may be impossibly high.

Full copies of the D&O report as well as Willis’ perspectives on the Employment Practices, Fiduciary and Fidelity sectors are available by e-mailing your request to prince_da@willis.com.

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