Driven by the potential for litigation from a broad range of constituents and a heightened concern over the threat of regulatory investigations, more companies across a wide range of industries are increasing their directors & officers (D&O) liability limits, according to global professional services company Towers Watson’s 2010 D&O Liability survey. Further, among those companies with international operations, a growing number are also purchasing a D&O policy in a foreign jurisdiction.
The Towers Watson survey revealed that 21% of respondents said they had increased their D&O limits compared to their prior D&O policy, versus 12% in 2008, the last time the survey was conducted. Additionally, while 75% said their limits had stayed the same — versus 86% in 2008 — only 3% said they had decreased their limits.
“Clearly, companies are reacting to the fact that D&O liability exposures facing directors and officers are arguably at an all-time high,” said Larry Racioppo of the executive liability group in Towers Watson's Brokerage business. “Insurance buyers continue to be threatened by an ever expanding litigation environment and have an increased awareness over regulatory issues they might encounter.
“The current state of the insurance market may have also contributed to the increase in limits purchased, as we are operating in a highly competitive market with many insurers chasing fewer clients, which leads to reduced pricing,” Racioppo added, noting that according to Towers Watson’s third quarter 2010 Commercial Lines Insurance Pricing Survey (CLIPS), D&O pricing showed a decline for the fourth consecutive quarter. “It is also likely that purchasers are reallocating a portion of their savings to buy additional limits.”
Of those companies surveyed, 53% said their companies have international operations. Of this figure, 25% purchased a local D&O policy in a foreign jurisdiction, a marked increase over 2008, where only 2% of respondents with international operations purchased a local policy in a foreign jurisdiction. Additionally, as a general rule, the larger the company, the more likely it was to purchase local D&O coverage. As such, 68% of companies with US$10 billion or more in assets said they bought local policies, while 23% of companies with less than US$250 million in assets did so.
“Clearly, multinational organizations have a better understanding that the risk environment has clearly changed, and they are seeing that navigating local laws and regulations are complex, depending on the region,” said Michael F. Turk, a Towers Watson senior consultant. “However, as a result of the time spent becoming more familiar with local issues as it relates to their own distinct situation in a particular country, companies are making more informed decisions as to how to best protect their directors and officers.”
Among other highlights of the survey:
• When asked if they had conducted an independent review of their D&O program within the past two years, 54% of respondents said that they had not. Of that 46% that did conduct a review, 20% said they used an outside broker, 19% turned to a law firm for review and 7% said they engaged a consultant. The competitive insurance market might explain why more companies are not having their D&O program reviewed. Respondents might also have confidence in their current broker’s knowledge and level of service provided.
• On average, 35% of private organizations bought excess Side A coverage. Findings also indicated the larger the company, the more likely it was to purchase this type of coverage. Eighty percent of private companies with more than $10 billion in assets bought a dedicated excess Side A policy, compared to only 20% of private companies with less than $250 million in assets. Additionally, more than 80% of public company respondents purchased Side A coverage, which reflects a significant increase over 2008. Clearly, the Side A policy has become an integral component of an organization’s D&O program structure.
• When asked about the main impetus for the purchase of an excess Side A difference in conditions (DIC) policy, the broad range of responses highlights the fact that companies clients understand the myriad of benefits offered by a comprehensive Side A DIC program, including: broader coverage than traditional A/B/C policy (47%); dedicated limit to the individual that is not depleted by corporate liabilities (46%); protection against the lack of availability of corporate indemnity (30%), and protection against underlying insurer insolvency (29%). Many directors and risk professionals share an underlying sense of concern about their exposure. With premium prices down, it is generally agreed that the purchase of an excess Side A policy is a sound investment.
• Thirty-five percent of nonprofit and 22% of private company respondents said they were not sure how their D&O program was structured. This finding suggests that brokers and other management liability consultants need to spend more time educating their nonprofit and private company clients about their D&O insurance purchase.
“The bottom line is that D&O coverage, and in particular a comprehensive Side A excess policy, at its core, is intended to protect the personal assets of the individual directors and officers,” said Racioppo. “The more educated purchasers are of the nuances of D&O policies, the better prepared they will be in utilizing the program to provide that last line of defense.”
Notes to editors: Side A coverage is the section of coverage under a directors and officers liability insurance policy affording "direct" coverage of an organization's directors and officers. This portion of the policy provides direct indemnification to the directors and officers for acts which the corporate organization is not legally required to indemnify the directors and officers.
For additional details and research findings, visit: Directors and Officers Liability: 2010 Survey of Insurance Purchasing Trends.
About the survey
The 2010 Towers Watson Directors and Officers (D&O) Liability survey — the 32nd in a series — was conducted online from October 5 through November 4, 2010. A total of 496 organizations that purchase D&O liability insurance participated in the survey.