Stamford, Conn. - Public and private companies—more than 66% of respondents—have received a record number of inquiries from potential board members who are concerned about their current directors and officers (D&O) liability insurance, an increase of 16% from 2005, according to the D&O Liability 2006 Survey on Insurance Purchasing and Claims Trends conducted by Towers Perrin. Nonprofit respondents received similar D&O inquiries from approximately 32% of their boards, up slightly (3%) from 2005.At the same time, the survey, which included 2,875 participants, shows that companies are responding to these inquiries by providing broader personal liability protection for directors and officers. In fact, 14% of those surveyed purchased Side A-only coverage in the past year. Side-A coverage provides D&O coverage for personal liability when they are not indemnified by the organization.
The popularity of Side A-only coverage reflects directors and officers desires for improved personal coverage, according to Stamford, Conn.-based Towers Perrin. This is particularly true for public companies, where 38% reported purchasing a Side A-only D&O policy this past year. Notably, the majority of stock option backdating claims seen so far have resulted in shareholder derivative claims, a common source of Side A D&O claims.
Among repeat survey participants, there was a 53% increase in organizations that purchased a Side A-only D&O policy. Twelve percent of repeat participants purchased such a policy, up from 8% in 2005. Although public companies are the most likely to purchase a Side A-only policy, the largest percentage increases occurred with private and nonprofit organizations.
Looking ahead, Towers Perrin expects to see an ongoing demand for Side A-only coverage, but also anticipates even greater changes in the types of coverage required by independent board members.
Towers Perrin's D&O liability insurance average premium index dropped 18% in 2006 after dropping 9% in 2005 and 10% in 2004. For repeat participants, the average premium reduction was 6.5%. But while the downward change in premiums points toward a softening market, nearly the same percentage of companies experienced a premium increase (36%) as those that had a decrease (38%).
Furthermore, changes in premiums varied substantially across organizations. Repeat public company participants with assets less than $6 million reported a 21% reduction, compared to a 4% reduction for public companies with assets greater than $10 billion. In contrast, repeat private organizations reported a 5% increase in premiums.
"Securities claim filings were down in 2006," says Michael Turk, senior consultant at Towers Perrin. "Many reasons have been cited for this, such as improved corporate governance and reduced stock market volatility. We do not believe, however, that the current improved risk profile will support prolonged soft market premium decreases if underwriters want to write this line profitably."
Consistent with the 2005 survey, 15% of participants reported increasing their D&O limit. The average limit purchased across all participants was $11.55 million, a reduction from 2005 that is based largely on increased participation by smaller organizations. If new participant data is excluded, repeat participants reported an 8% average increase in limits across all asset sizes, from $9.31 million to $10.23 million. The largest increases reported by repeat participants were for organizations with assets between $1 billion and $10 billion. The utilities and durable goods classes showed the highest average limits.
For 2006, claim susceptibility across all business classes decreased 2% from 2005, to 14%. Public companies showed significantly higher claim susceptibility (31%) than private companies (9%) and nonprofit organizations (4%). The claimant distribution continues to be heavily dependent on the ownership structure of survey participants. For example, 49% of the claims against public participants were brought by shareholders. In contrast, 92% of the claims brought against nonprofit participants were brought by employees. The health service and utilities industries are most susceptible to D&O claims, based on survey responses, with the health services industry experiencing the highest claim frequency.
Nearly half (46%) of claims against 2006 participants have been closed, which remains consistent with last year's survey. The large majority of the closed claims were closed by settlement (61%), while the percentage of claims closed by litigation increased slightly from 10% in 2005 to 12% this year.
Other highlights of the survey include:
- Side A-Only Limits Represent Significant Portion of Total D&O Limits: The average Side A-only limit for those participants who also purchased a Side A, B and C policy was $15.0 million. This represented 31% of the organization's total D&O limits purchased. Interestingly, this percentage was fairly consistent across all asset sizes.
- Growing Coverage Enhancements: Thirty-one percent of participants reported an increase in coverage enhancements to their D&O policy, and 8% also reported a decrease in policy exclusions.
- Average Retentions Down Slightly: Repeat participants reported an average 6% decline in their retentions (from $484,000 to $456,000). Among all survey respondents, only 20% with renewals since the second half of 2005 reported increases in their retentions, down from 29% in 2005. Overall, 70% of U.S. participants reported no change in their retentions, compared with 63% in 2005.
Source: Towers Perrin
