D&O Premiums: Up, Up & Away
from
May/June 2002
by Jessica Fourneret
Directors used to worry about whether their directors’ and officers’ liability insurance was good enough. Today they should wonder whether they’ll even be able to get basic coverage. Not only are class-action suits pummeling companies at an unprecedented rate, but the settlement amounts that insurance carriers pay are setting new records. Three years ago, it was hard to find a D&O claim that was settled for more than $100 million. In the past couple of years, over a dozen have reached $200 million or more, says Mark Larsen, a consultant at Tillinghast-Towers Perrin, a management consulting firm. Adds Don Bailey, managing director of Aon Financial Services Group, a division of Aon Corp., a Chicago-based broker: “The insurers are getting hit with losses they never had before.”
As the chart shows, the cost of D&O coverage dropped significantly during the late 1990s, a beneficiary of what Larsen calls “almost cutthroat price competition.” In addition, insurance companies were doing so well with their Wall Street investments that they may have taken their eyes off just how unprofitable their D&O business really was. While the stock market stayed strong, premiums continued to fall.
In 2000, things changed. Premiums couldn’t cover insurers’ anticipated losses, not to mention the unanticipated ones. “They ran the cycle out a little bit too far,” says Larsen. “The prices got too low, and there were more claims than they anticipated.” Premiums began to climb. Then came September 11 and the collapse of Enron, Global Crossing, and other companies that have filed for Chapter 11. Potential trouble at Tyco and the like is accelerating the increase.
The new key word for insurers is transparency. “Senior management is really expecting all underwriters to look at their clients’ financials and risks much more closely than was previously the case,” says Steven H. Anderson, managing director of Marsh and vice chairman of the Finpro division. In other words, companies now have to prove that they—and their directors—are worthy of D&O coverage.
