Is the hard market softening? What goes around comes around: important signs are pointing to a softening of the D & O insurance market.

• Author: Weiss, Stephen J.
• Position: D & O INSURANCE UPDATE

BY ALL KEY MEASURES, the hard market is softening. This observation is based on negotiating nearly 50 D & O insurance policies in recent months and is consistent with the views of experienced brokers interviewed for this column. While 50 policies may not constitute a statistically significant sample, this report on our experience has the virtue of being current, which is very important. Why is timeliness important? Ask any risk manager going into renewal negotiations in the next few weeks. He needs current information to better judge the terms of the quotes presented by the company's brokers, particularly premium rates. Such information also allows him to more accurately guide top management's expectations about the cost of the company's D & O program for the coming policy year.

What signs identify a softening D & O insurance market? Flat or decreasing premiums are key. Other signs are higher policy limits being offered to individual companies and insurers' willingness to negotiate coverage-enhancing endorsements.

Premiums. Instead of the heart-stopping increases of the past few years, we have been seeing decreases in the amount of renewal premiums on primary policies, in some cases between 10% and 30% less than a year ago. The same is true for excess policies. Premium rates are dropping as measured by their percentage of the immediately underlying layer (called the increased limits factor). In 2003, the increased limits factor was as high as 95%. In May 2004, to cite one example, the increased limits factor on each of the four $10 million layers of a client's $50 million D & O insurance program was only 75%.

Higher Limits. High-limit policies were frequently written in the soft market of the late 1990s. A large insurer might write $35 million or more of D & O insurance for a single company. For example, Associated Electric & Gas Insurance Services Ltd. wrote a $35 million primary policy for Enron Corp. for the policy year ended September 1, 1999. In the subsequent hard market that began surfacing in 2001, insurers decided not to put too many eggs in one basket. Insurers with the capacity to write up to $50 million per account might write only $10 million. We have seen a turnaround, however, with recent renewals. An insurer that would write only a $10 million primary policy a year ago offered $15 million of limits. Another insurer on the program that would write only a $5 million excess policy last year has offered to put up twice that...