The Market for Directors’ and Officers’ Insurance

• Published date: 01 September 2014
• Author: Stephen G. Fier,Andre P. Liebenberg
• DOI: http://doi.org/10.1111/rmir.12023
• Date: 01 September 2014

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2014, Vol.17, No. 2, 215-239

DOI: 10.1111/rmir.12023

THE MARKET FOR DIRECTORS’AND OFFICERS’

INSURANCE

Stephen G. Fier

Andre P. Liebenberg

ABSTRACT

Directors’ and officers’ (D&O) liability insurance is a commonly used risk man-

agement tool for corporations both in the United States and abroad. While prior

research has focused on the demand for D&O insurance and its rolein corporate

governance, there is an absence of literature on the supply side of the D&O mar-

ket. Using the newly available D&O Insurance Coverage Supplement to insurers’

statutory filings, we develop a more comprehensive understanding of the D&O

insurance market and of those firms that write D&O coverage. We develop and

estimate a model of the decision to write D&O insurance and the extent of mar-

ket participation. Our results suggest that there are significant operational and

financial differences between firms that supply D&O insurance and those that

do not. Several of these differences (specifically, size, diversification, and orga-

nizational form) are consistent with the predictions of the managerial discretion

hypothesis.

INTRODUCTION

Directors’ and officers’ (D&O) liability insurance provides increasingly important cov-

erage to corporations and their officers for potentially substantial defense and settle-

ment/judgment costs. There is a growing body of empirical research focused on the

factors associated with D&O insurance demand (e.g., Core, 1997; O’Sullivan, 2002; Boyer

and Delvaux-Derome, 2002; Boyer, 2003; Mansfield et al., 2012) and the role of D&O in-

surance in corporate governance (e.g., O’Sullivan, 1997; Core, 2000; Chalmers et al., 2002;

Griffith, 2006; Baker and Griffith, 2007; Chung and Wynn,2008; Chen and Li, 2010; Boyer

and Tennyson, 2012; Gupta and Prakash, 2012). Although the U.S. insurance industry

writes over $5.40 billion in D&O premiums annually,1there is an absence of research

that examines the supply side of the D&O market. As a result, very little is known about

This article was subject to double-blind peer review.

Stephen G. Fier, School of Business Administration, University of Mississippi; phone: 662-915-

1353; e-mail: sfier@bus.olemiss.edu. Andre P. Liebenberg School of Business Administration,

University of Mississippi; phone: 662-915-5475; e-mail: aliebenberg@bus.olemiss.edu.

1Based on authors’ calculations using data contained in the NAIC D&O Insurance Coverage

Supplement.TheD&O Insurance Coverage Supplement only requires insurers to report direct

premiums written for monoline policies and not for package policies. Because of this limitation,

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the industrial organization of this market and the characteristics of firms that choose to

write D&O coverage. In this article we exploit a newly available data set to provide a

first look at the D&O market and to test theory regarding firm-specific determinants of

the decision to write D&O insurance.

The U.S. D&O insurance market is characterized in part by a general lack of disclosure,

both on the supply and the demand sides of the market. For instance, while some coun-

tries require corporations to disclose information regarding D&O insurance purchases

in their annual financial reports and regulatory filings, the United States does not require

such disclosure.2Similarly, while property–casualty insurers in the United States are re-

quired to submit information pertaining to their operations to the National Association of

Insurance Commissioners (NAIC) on an annual basis, in the past insurers have not been

required to separately report premium, loss, and expense data for the D&O line of busi-

ness. Rather,data associated with the D&O line were included in a set of catch-all liability

lines in the annual statements titled “Other Liability,”making it impossible to disentan-

gle the D&O information from the other lines of business included in “Other Liability.”3

Beginning in 2011 the NAIC began to require insurers to complete the Director and

Officer Insurance Coverage Supplement. As part of this supplement, insurers that write

D&O insurance are required to provide information regarding premiums, losses, and

defense and cost containment, as well as include a breakdown of the proportion of

business written on an occurrence basis and a claims-made basis. Given the availability

of these data, we are able to provide the first detailed analysis of the U.S. D&O market,

at both the industry and firm level. Our analysis focuses on two related topics. First, we

provide an overview of the supply side of the D&O insurance market by determining

the contribution of D&O insurance premiums to overall industry premiums, calculating

the contribution of D&O premiums to total firm premiums for the top D&O writers,

and examining the industry concentration of the market. Second, in order to gain a

more comprehensive understanding of the firms that write D&O insurance we develop

and estimate a model of the decision to write D&O insurance and the extent of D&O

insurance business written.

As a preview to our findings, we find that D&O insurance is the 11th largest line

of property–casualty insurance, accounting for slightly more than 1 percent of total

industry premiums. While nearly 12 percent of insurers write D&O, the market is quite

concentrated, with the top 10 writers accounting for almost 58 percent of the total D&O

market. Our empirical analysis into the factors associated with the decision to write

we are unable to account for premiums written for the D&O component of package policies in

our calculation.

2This is a primary reason why the vast majority of studies that focus on D&O insurance take place

outside of the United States and commonly use data from Canada (Core, 1997; Boyer and Stern,

2012; Boyer and Tennyson, 2012), the United Kingdom (O’Sullivan, 1997, 2002), and elsewhere

(e.g., Zou et al., 2008).

3The “Other Liability” category contained in the NAIC annual statements includes the following

coverages: construction and alteration liability; contingent liability; contractual liability; eleva-

tors and escalators liability; errors and omissions liability; environmental pollution liability;

excess stop loss, excess over insured or self-insured amounts and umbrella liability; liquor lia-

bility; personal injury liability; premises and operations liability; completed operations liability;

and nonmedical professional liability (NAIC, 2007).