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What’s Going on With D&O?. 2002 CAS Annual Meeting. Agenda. Background Market Overview Drivers of D&O Summary Questions. Background. 2. What does a Directors and Officers liability policy cover?. Original Intent Cover the Directors and Officers of the organization

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What’s Going on With D&O?

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What’s Going on With D&O?

2002 CAS Annual Meeting


  • Background

  • Market Overview

  • Drivers of D&O

  • Summary

  • Questions



What does a Directors and Officers liability policy cover?

Original Intent

  • Cover the Directors and Officers of the organization

    • Provides coverage for claims arising from the “wrongful acts” of insured persons while serving in their capacity as Directors or Officers

  • Typical D&O policy consists of two sections

    • Personal coverage (Side A)

    • Corporate reimbursement coverage (Side B)

  • Until late 1995, allocation of loss between the Directors and Officers and the entity itself

    • Allocation was either negotiated or predetermined

    • Insurance contract covers only the loss allocable to the Directors and Officers; Insured covers the loss allocable to the entity

What does a Directors and Officers liability policy cover?

Broadened Coverage Beginning in 1995

  • Cover extended to include the entity in addition to the Directors and Officers (Side C)

    • Directors & Officers share the policy limit with the entity

    • Insurance contract covers 100% of losses; insured pays 0% after retention

    • Additional coverages granted such as Employment Practices Liability, Fiduciary Liability, Errors and Omissions

    • Broader coverage terms

      • Lower merger and acquisition thresholds

      • Waiver of applications and signed warranty statements

      • Multi-year contracts

      • Extended reporting period

What does a Directors and Officers liability policy cover?

Move Toward Coverage Changes Beginning in 2001

  • Reintroduce allocation

    • Control insurers’ cost

    • Restore contract to original intent of coverage for Directors and Officers

  • Pull back additional coverage grants for lines like Employment Practices and Errors and Omissions by unbundling contracts

  • Restriction in coverage terms (cease multi-years, raise M&A thresholds, tighten notice provisions, require signed applications and warranty statements etc.)

  • Increased demand for A-side only cover

Market Overview


The U.S. D&O market is growing toward $7.5 billion

Estimated Direct Written Premiums

Growth Drivers

$ Billions

  • Increasing rates, particularly significant in some segments among publicly traded insureds

  • Increased penetration among private companies through 2000, potentially reduced in hard market going forward

  • Broadening and contracting coverage







Assumed % change in Price -5 +6 +20 +30

Assumed % change in Exposure +5 0 0 -5

Source: A.M. Best; industry press, Tillinghast estimates. Note: These are midpoints of a range

of estimates, e.g., 2000 base range is $4 billion to $6 billion. As D&O financial results are combined with other liability coverages in the Annual Statement, precise figures are not available.

Public insureds represent the largest share of the market

Distribution of Premium by Segment

By Ownership Type

By Coverage Type

Source: Tillinghast D&O Survey, Tillinghast estimates.

Technology, pharmaceutical and health sectorsrepresent a disproportionate share of the for-profit market

Distribution of Premium by Segment

For Profit by Industry

For Profit by Account Size

Small: Assets < $100M

Mid: $100M < Assets < $1B

Large: $1B < Assets < $10B

Very Large: Assets >10B

Source: Tillinghast D&O Survey, Tillinghast estimates.

The D&O market is highly concentrated, with 2 players writing over half the business

Estimated 2000 D&O($ Millions)

Share of Market
























Old Republic



Rock River



Great American



































All other



Source: Tillinghast D&O Survey, Tillinghast estimates.

Growing D&O loss levels have caused certain players to exit the market and others to strengthen reserves

  • 7/99 - Chubb acquires Executive Risk

  • 9/00 - Hartford acquires Reliance’s D&O staff and book

  • 10/00 - Kemper enters D&O market

  • 11/00 - Fireman’s Fund acquires ERC’s not-for-profit D&O book

  • 7/01 - AIG reintroduces coinsurance

  • 7/01 - ACE D&O Report headline, “Size of D&O Settlements Exploding”

  • 7/01 - Trenwick announces D&O reserve strengthening

  • 8/01 - SVB Syndicates (Lloyds) announce significant losses due in part to “a sharp increase in lawsuits against US company directors”

Continued exit by smaller, less profitable writers may result in a further concentration of business among larger players

Roughly 20% of D&O business is reinsured with non-affiliated entities

Top Buyers of Reinsurance (Estimated 2000 Ceded Premium)

Reinsurance of D&O Premiums

  • AIG 300

  • Lloyd’s 150

  • Hartford100

  • Zurich 60

  • Great American 50

  • Gulf 50

  • CNA 35

  • Admiral 35

  • RSA 25

  • Chubb 25

Reinsured:$1.0 Billion

Retained:$4.0 Billion

2000 DWP: $5 Billion

*Based on total other liability claims-made premiums reinsured with non-affiliates. Source: A.M. Best, Tillinghast calculations.

Drivers of D&O


Timeline of significant milestones in the D&O Market:1933/34 Securities Acts

  • Securities Act of 1933, Section 11: Directors and Officers are liable for misrepresentations and omissions in a public offering registration statement filed with the SEC

  • Securities Act of 1933, Section 12: Directors and Officers are liable for material misrepresentations and omissions in written materials or oral communications in the sale of securities

  • Securities Exchange Act of 1934, Section 10b: Directors and Officers are liable for any misrepresentation or omission in connection with any purchase or sale of securities. This includes both public offering sales and after market sales.

Timeline of significant milestones in the D&O Market:1995 PSLRA

  • Intended to prevent abuses of securities class action lawsuits

  • Not intended to eliminate all litigation, only frivolous

  • Safe Harbor provision to protect Forward-Looking Statements

  • Heightened Pleading Standard

    • Pleading must include specific details of materially false and misleading statements or failure to disclose statements that would constitute a fraud

  • Stay of Discovery while a Motion to Dismiss is Pending

  • Lead Plaintiff - Largest financial interest

Timeline of significant milestones in the D&O Market:2002 Sarbanes-Oxley

  • Black-out trading barred

    • Directors and Officers cannot trade securities received for their work, where the trades take place during black-out periods in which employees cannot also trade the company stock.

  • CEO and CFO certifications

  • Executive loans prohibited/Freeze on extraordinary executive funds or payments.

  • Executive pay forfeited for restatements

    • For the 12-month period following the first filing with the SEC of a restatement required due to misconduct relating to material noncompliance with financial reporting requirements

  • Faster insider trading disclosure

    • Securities transactions by directors, officers and owners of more than 10% of the company securities must be revealed to the SEC and the public within 2 business days of the transaction, instead of the current time frame of 10 days after the first month in which in the transaction occurred

Timeline of significant milestones in the D&O Market:2002 Sarbanes-Oxley (cont.)

  • Closer auditor management

    • Public companies may not use their outside auditor for specifically listed non-audit services, unless de minimus

    • The lead audit partner of the public company accounting firm must be rotated off the audit after auditing the company for five consecutive years

    • Liability ensues for any officer, director or representative thereof who fraudulently influences, coerces, manipulates or misleads the company’s outside auditors

  • Increased Audit Committee duties

  • Increased financial disclosures

  • Increased SEC review

  • More time to sue

  • More criminal penalties and fines

  • Increased Accountants and Lawyers’ responsibilities

Starting in the mid-1990’s, the D&O industry entered into a soft market

  • Expanded capacity/larger limits offered

  • Expanded coverage, entity coverage eliminated pre-set allocation

  • Blended programs including D&O and E&O, with significant discounts

  • Broker forms and lack of applications

  • Free/automatic reinstatements

  • Bilateral discovery - under-priced ERP’s

  • Multi-year contracts, significant discounts and no ability to re-underwrite

The stock market bubble of the late 1990’s had profound effects on the D&O market

  • Stock volatility/Earnings pressure to compete

  • Increased number of IPOs, mostly Internet stocks

  • Increased market capitalization, many times earnings

  • New entrants, naïve capacity

  • Readily available reinsurance capital

  • Top-line focus

  • Increased M&A activity

The current landscape of the D&O market has changed significantly over the last 12 to 24 months

Description/D&O Market Implications


Source: Tillinghast – Towers Perrin analysis; industry press

“Best practice” companies are most likely to remain profitable in a rising cost environment

  • Underwriters that understand their insureds

    • Close/frequent monitoring of insureds’ financial results

    • Significant information disclosure required during application/underwriting process

  • Active loss mitigation/risk management programs

    • Ability to manage both securities and human resources claims

  • Corporate Governance reviews by outside parties

  • Active retention management on EPL

  • Strong broker relations

  • Active actuarial participation

    • Understand drivers of loss costs - size and segment key drivers

    • Create architecture around the pricing of a risk vs. market pricing

      • Reevaluate the expense base used in rating

      • Update Increased Limit Factors and Deductible Factors

      • Ensure data integrity

      • Keep pace with trend

    • Understand company’s case reserving philosophy

    • Regular open dialogue between claims, actuarial and underwriting



Key takeaways

  • Results vary significantly across market segments

    • Not-for-profit and private, for-profit business present a different type of D&O exposure than public for-profit companies

    • Public exposures, however, show mixed results, with larger insureds looking unprofitable

    • Previously clean segments now looking much different (utilities)

  • D&O premiums are in a rapid growth phase

    • Fueled by significant price increases (estimated 20% in 2001; 30% or more in 2002)

  • Rapidly rising claim costs have also been a prominent feature of the D&O landscape

    • Historical average increase approximately 10% through 1999

    • Rate of increase may have doubled since then

    • Hard data not available

Key takeaways

  • The implications of primary insurers’ lack of profitability are

    • Weaker players will continue to exit the business, possibly resulting in increased industry concentration

    • The most profitable players will be those embracing loss mitigation/risk management programs and disciplined, data-driven underwriting approaches

  • Implications for reinsurance partners

    • Excess reinsurance will require extra care in underwriting, as will reinsurance of books with heavy concentrations of large public risks

    • Leveraged effects of inflation on excess positions present unique challenges

    • Profitable reinsurance opportunities may exist in the market -- the challenge is finding the right cedents

      • Mix of exposures (I.e. size and industry of insureds)

      • “Best practice” underwriting, pricing and loss mitigation/management… and the right reinsurance structure and terms

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