The hardening market for Directors and Officers liability coverage is forcing brokers and their clients to accept higher rates, less coverage and larger retentions, panelists told a recent PLUS D&O Symposium. These tight market conditions put a premium on the relationships that underwriters have with brokers and brokers have with their clients.
Panel moderator Michael Cavallaro, ARC Excess & Surplus, LLC/Professional Risk Facilities, Inc., observed that after five years of soft pricing, generous terms and mounting underwriting losses, the hardening of the D&O market accelerated throughout 2001 and tightened even more quickly after Sept. 11.
Anthony Galban, Chubb Specialty, said that the timing of a turnaround in the market resulted from the nature of the D&O business of long-tail line replete with multi-year programs in which it takes a long time for actual experience to be adjusted. “The market doesn’t turn until the underwriters can’t stand it anymore,” Galban said.
James F. O’Neill, Aon Financial Service Group, commented that, “everyone miscalculated” the severity of potential losses and consequences of a seriously under-priced product. The hard market is not surprising “given the fluid dynamics of supply and demand.”
Jeffrey Lattman, Marsh Inc. FINPRO, agreed, noting “You can’t just blame the underwriters for the soft market. Brokers pushed for the best deal for their clients.”
Christopher L. Sparro, National Union Fire Insurance Company, further pointed out that reinsurance companies play a large role in determining the nature of the market. Having experienced staggering losses themselves, reinsurers are no longer willing to tolerate the same level of risk any longer.
Lattmann acknowledged that deals are getting done in the hard market environment, but “they are tougher and take longer to do.”
It is more important than ever for brokers to spend more time educating the underwriters on the risk they are being asked to assume. “Underwriters are doing more due diligence,” he said.
At the same time, brokers need to explain to their clients the reasons behind the change in market conditions – the high frequency and severity of D&O claims, the increased cost of capital to insurers and the reduction in their investment gains, according to Lattmann. “The clients don’t want to hear it, but they do want to understand it,” he said.
Sparro said that underwriters today are carrying out more in-depth risk evaluations than ever before. In particular, he said, they are scrutinizing such factors as the role of audit committees and partnership transactions.
“The underwriting process has taken on a different tone,” Sparro said. He added that underwriters are frequently requesting face to face meetings with clients to answer their questions and provide more information about company finances, structure and operations.
Galban said that from his perspective “the relationship with the broker is huge.” He explained that underwriters need an intimate understanding of the client and “getting that understanding is based on the relationship with the broker” who arranges for meetings and provides detailed information.
Given his belief that “underwriting is more art than science,” he said, “there is a moment when you look them in the eye to see if they have the skills to perform their management functions.”
While companies in more volatile industries – high-tech and bio-tech, for example — are facing higher rates and more restrictive coverages than others, Galban observed that from a D & O underwriters perspective, “there are no safe companies any more.”
Lattmann added brokers are getting CFOs and general counsels to meet with underwriters looking for information needed in their risk evaluation. Underwriting changes also include higher deductibles and the discontinuation of multi-year programs common during the soft market.
In addition, D & O insurers are calling for co-insurance agreements that have the effect of policyholders “putting skin in the game.” That sharing of risk also makes policyholders less willing to settle claims too quickly.
Right now, we’re paying the bill, but we don’t have much to say about it,” said Galban.
While the duration of the hard market is unclear, one variable is the influx of new capital into property/casualty companies, panelists said. “There is a lot of new, untested capital,” O’Neill observed.
All agreed that the hard market challenges the relationships between insurers, brokers and their clients. Amidst the turmoil, “We preach loyalty and partnership,” O’Neill added.
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