Risk Reporter: D&O Premiums Continue to Rise

The trend of rising directors’ and officers’ liability (D&O) insurance premiums, which began in 2001, continued through 2002, according to Tillinghast-Towers Perrin’s 2002 Directors and Officers Liability Survey. The survey, which involved 2,275 participants in the United States and Canada, states that premiums climbed almost 30 percent while claim frequency and claim severity leveled off—although shareholder claims severity increased.

“In light of recent events, a dramatic surge in premiums is not really that surprising,” says Mark Larsen, survey leader and Tillinghast consultant. “Declining stocks on Wall Street and the unprecedented, large corporate scandals that have plagued business over the past year were clearly the main drivers of the rate increases. Until we see some improvement in the stock market and shareholders believe that good corporate governance has taken hold, we can expect to see this trend continue into 2003, and possibly beyond.”

Other contributing factors for premium increases have been a rise in the cost of D&O lawsuits, higher reinsurance rates and increased selectivity and tougher guidelines from underwriters, even for firms that are considered good risks. About 78 percent of U.S. insureds and 82 percent of Canadian insureds reported premium increases.  

Over a ten-year period, about 19 percent of U.S. survey participants and 17 percent of Canadian participants saw one or more claims against their directors or officers. In 2002, claim frequency remained stable, as did average legal costs and payments on claims.

The average legal costs for U.S. participants dropped slightly to $520,000 in 2002. Indemnity payments for closed claims in the United States averaged $5.72 million, up just $70,000.

Claim severity, however, varied significantly between claimant types. Shareholder claim payments went up 36 percent to an all-time high average of $23.35 million in 2002.

For shareholders, the most frequent claims issue was inadequate or inaccurate disclosure, including financial reporting and claims related to stock offerings. In 2002, 46.4 percent of shareholder claims were filed for this reason, compared to 38.8 percent in 2001 and 19.9 percent in 1990. These disclosure issues have replaced the merger and acquisition concerns that, up until six years ago, had been the leading reason for shareholder D&O claims. In 1990, more than 40 percent of shareholder claims were due to mergers and acquisitions, but by 2002, this number had fallen to 16.1 percent.

Overall, however, the most frequently cited D&O claim issue among U.S. participants was employment discrimination with 27.1 percent of all claims and 43 percent of employee claims.

Although almost all companies surveyed have secured D&O coverage,  average policy limits decreased for the first time in eight years, from $20.1 million in 2001 to $18.9 million in 2002. Seeing a lack of need for coverage, high cost and limited coverage were most often cited as reasons for not purchasing D&O insurance.