D&O Primary, Excess Layer Pricing Moving in Opposite Directions: Aon

November 20, 2014

Overall price declines for directors and officers liability insurance programs of publicly traded companies continue to be driven by excess-layer price drops, Aon’s Financial Services Group said in a recent report.

D&O insurance pricing fell 4.4 percent overall during second-quarter 2014 compared to the same period a year ago, the quarterly D&O pricing index report said.

The 4.4 percent figure measures the drop in a pricing index that Aon tracks from a base year of Jan. 1, 2001, capturing information on over 9,000 publicly traded D&O programs. The second-quarter 2014 index of 0.87 compares to a 0.91 index for second-quarter 2013.

Offering a more compelling year-over-year price comparison, Aon reports that overall pricing actually decreased 5.4 percent for only those programs that renewed in both second-quarter 2013 and second-quarter 2014.

Prices for primary policies that renewed in both periods with the same limit and retention increased 3.8 percent, on average. “Remembering that D&O programs are most often built on a layered basis, basic math would indicate that excess pricing continues to decrease more than enough to compensate for the increase in primary pricing, resulting in the average total program renewing down 5.4 percent,” the report says.

Aon’s other pricing observations for the 2014 second quarter include:

  • While still rising, the primary price change in second-quarter 2014 (3.8 percent) is about half of the increase in second-quarter 2013 (7.1 percent).
  • Eighty-one percent of clients reported either primary policy price increases or flat renewals (for policies with the same limit and deductible).
  • The 19 percent receiving decreases on the primary layer represented the highest level since second-quarter 2012, when 21 percent reported declines. Thirty-eight percent reported declines in first-quarter 2012.
  • Clients retained more upfront risk on their programs, as indicated by a 14.8 percent year-over-year jump in D&O program deductibles.
  • Clients also purchased more overall limit—4.9 percent more, on average.

In its report, Aon also reports on customer considerations in choosing and sticking with carriers, based on information from the Aon Global Risk Insight Platform (Aon GRIP), which also feeds the calculation of the pricing index. The GRIP information reveals that clients overwhelmingly choose carriers with whom they have incumbent relationships; price is a secondary consideration, and coverage terms rank a distant third. “It does not appear that lack of coverage or capacity is a driving factor” in carrier choice, the report says. “This is yet another example of a highly competitive landscape.”

Aon puts together its quarterly pricing index using data compiled on more than 9,050 D&O programs for publicly traded companies between Jan. 1, 2001 and June 30, 2014. The base year, 2001, is the average price per million for $1 million of coverage costs for the 2001 calendar year.

A/B/C coverage, Side A only (nonindemnifiable loss) and Side A difference-in-conditions placements are included. Blended D&O/fiduciary programs are not.

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