OVER THE PAST YEAR, changes have been afoot in the directors and officers (D & O) liability insurance market, and these changes have implications for every board member.
The two most significant changes have been the "softening" of the market for D & O insurance--which means potentially lower rates and greater coverage limits with broader terms and conditions--and the increasing interest directors personally take in their D & O coverage. As David Hong, senior vice president, corporate governance consulting at Marsh Inc., puts it: "In today's environment, increased publicity has driven a heightened concern by directors and officers on the terms and conditions of their policies."
"We've found that with more and more clients, we're dealing directly with the board in explaining insurance, and the implications of changes in terms and conditions and carriers," says Susanne Murray, executive vice president and D & O practice leader, HRH Executive Risk Solutions. "Directors used to ask, 'We do have D & O, right?' Now we're seeing much more interest in the terms, limits, and the pricing of the policy."
Agrees Jack Goodwin, chief underwriting officer, Public Company Liability, St. Paul Travelers: "Directors are asking questions about the length of time their carrier has been in the business, and they're asking questions about the limits of their D & O policies. We're still in an era of mega securities class-action settlements, with the settlements dwarfing actual limits. The liability for every director in today's market is pretty challenging."
But even so, some insurers think there is more that can be done. "I continue to be surprised by the lack of direct board involvement in D & O insurance," says John W. Keogh, vice president, domestic general insurance, AIG, and president and CEO, National Union Fire Insurance Co. "More involvement by the board in analyzing their policy and insurance carrier choices would definitely serve them well."
There are a number of reasons why it behooves directors to become more proactive in their D & O policy choices. The most obvious, of course, is the litigation situation. As Carol Zacharias, senior vice president and underwriting counsel of ACE USA's professional risk division, notes, "The severity of lawsuits has gone up. Exposure has gone up. The volume of suits since 1995 has gone up. So directors should be more aware of their D & O policies than ever before. And that just wasn't the case 10-20 years ago."
But a more compelling reason can be found in the current "soft" market. In the "hard" insurance market of the recent past, not only did rates increase, but also negotiability on coverage limits and terms and conditions was narrow. Today, increased competition for D & O premium dollars is creating an opportunity for board members to lower their rates, increase their coverage, and negotiate on key terms and conditions.
And that represents an excellent reason for directors to review their current coverage (or coverages, if they serve on multiple boards). This "Director's Guide to D & O Insurance" looks at the current state of the D & O market and its implications for board members. It also discusses strategies for ensuring the best coverage and rates. We include a punchlist of critical questions from the board member's perspective.
State of the market
Let's start with a definition of the "soft" market. Softness may mean price reductions, increased coverage limits, or broader terms and conditions--or a combination of all three. But not everyone agrees on exactly how the soft the market is, or how long the softness will last.
"The D & O market is a bit uncertain from the point of view of pricing, compared to this time a year ago," says AIG's Keogh. "Last year, there were price increases across the board out of recognition of diverse loss development trends. A year later, at any given moment I find it difficult to tell clients what to expect. The last survey I saw showed that roughly half of clients renewing got increases and half got decreases. So we still have clients seeing rate increases, which are based on the risk assessment of those companies."
According to Keith Thomas, Zurich's senior vice president, management solutions, "We're seeing rate relief for customers, though that relief is not a constant, especially if a company is experiencing financial trouble or litigation. But where we see relief, it can be as much as 5% to 15%. Capacity is also not an issue, so if you're looking to build significant towers of D & O coverage, you can. And coverage terms are not as restricted."
"I'd describe the current condition as highly competitive from a pricing perspective," adds Todd Jones, North American practice leader in the executive risks practice of Willis. "There's pricing relief on the product and there appears to be a greater degree of flexibility from underwriters in providing certain coverages. It's frankly a drastic change from 12 to 18 months ago."
But Jones points out that this situation is a bit of a conundrum, "especially from the standpoint...