Recently, we spoke with a few individuals who are in the business of writing D&O coverage to find out where the market is and where it’s going. Much of what we learned closely mirrors a recent report by Standard & Poor’s (“The Heat is On D&O Insurers to Manage Volatile Market Risks”), which indicated that increased capacity, broadening claims coverage, and systemic “tail risk” is ever present.
What’s more, undisciplined competition and new aggressive players in the space has driven market pricing even lower, with many, including the S&P, expecting prices to continue their downward trend. In fact, Standard & Poor’s Rating Services maintains a “skeptical stance toward the D&O product line.”
“Whether you’re a large for-profit company or a small non-profit, there’s been no discrimination in terms of the D&O market,” said a long-time provider of D&O coverage when speaking to ProgramBusiness.com. “If you’re a publicly traded company you’re paying a lot less premium than you were three, four, five years ago, and you’re getting much broader coverage.” This is the case even light of the financial market collapse and bailouts, the real estate market collapse, the credit crisis, etc. in the last few years. “The rates didn’t harden, even though financial institutions, for example, have experienced an uptick in the number of claims. Usually, when you see an uptick in claims frequency, you also get a rise in premium dovetailed by restrictive coverage. This didn’t occur due to overcapacity and everyone fighting over the same premium dollars.”
Another source told us that an insured in the midst of a claim and up for renewal chose to go with another carrier. “In the past, very few companies would have looked at that account and the renewal would have remained with you, especially while a claim was still underway.” The insurance buyer’s loyalty and satisfaction combined with the brokerage firm handling the placement of the coverage would serve to keep the renewal with the existing insurer handling the claim process. “As a carrier, there is no longer a guarantee that you’ll keep an account with a claim following you or an account on which you have paid a claim. This may have happened from time to time in the past, but now more and more the insured is walking away for a cheaper rate. Carriers are coming in and seizing an opportunity to get the account by offering lower rates, and the insureds are going for it. There is no loyalty in this buyer’s market.”
Additionally, some feel that there is less regard for the A+ carriers, which is perplexing to those providing the D&O. “Why would a CEO of a major company or one in the middle market not want its D&O coverage with a highly rated carrier that has a stronger balance sheet? These firms are taking the risk of paying less premium with a lower-rated company.”
Where is the marketing heading?
The individuals we spoke with see the market staying exactly where it is. “It is not getting cheaper, and coverage continues to get even broader. We’re not seeing any price increases or any coverage restrictions in the future.” In fact, for some, 2011 has begun with a decrease in premiums. “Premiums are either flat or up to -13% of premium from last year. Premiums are getting lower to avoid the risk of losing the account, unless, of course, you decide it’s not worth keeping it any more.”
The Willis Marketplace Realties 2011 report backs up the outlook for diminishing rates, with a prediction that commercial D&O pricing will decrease by up to 15% for businesses and as much as 20% for financial institutions. The report also notes that rates for the primary layer are falling less sharply than rates for the excess layer because brokers have targeted the excess layers for premiums savings, which is particularly dire for those providing the excess coverage.*
On the positive side, there has been an increase and improvement in risk management analysis and risk management tools. “And what you don’t see today as we did in the 1990s or 2000s is one law firm continuously running to court with a lawsuit on behalf of shareholders against directors and officers. Lawsuits today have more legs to them, more meat to them.”
But the question does remain: If rates continue to fall and are not adjusted for increased exposures and/or for paying a claim, defense costs, posting reserves on a carrier’s balance sheet, etc., …if rates are not adjusted to reflect this and they keep going down, what will happen to the market, to this product? “You won’t have the margin spreads that once existed. It won’t necessarily be like selling auto insurance for GEICO, but it’s trending that way.”
*Standard & Poor’s, The Heat Is On D&O Insurers to Manage Volatile Market Risks