Still, at a time when cash and credit are scarce, stratospheric D&O prices are adding insult to injury. "We just plunked down $17 million for our D&O, errors and omissions, and other professional liability lines, on top of much higher deductibles — $25 million for everything but the E&O, and $50 million for the E&O," says the risk manager at an Eastern superregional bank who insisted on anonymity. Overall, the premium increase was in the 20 percent range, not too shabby, as the bank acknowledges modest subprime-mortgage exposure and was a recipient of federal TARP (Troubled Asset Relief Program) dollars.
Larger financial institutions with more-problematic risk profiles, on the other hand, are forking over veritable fortunes. "Last year we had a 90 percent premium increase in the primary layer of our D&O program, where the first few millions of dollars in a loss are absorbed, and we expect even larger price increases as we prepare for this year's renewal," says the risk manager at a major global financial-services firm, also off the record. "We have a blended program that combines D&O with E&O and other professional liability lines, for which we're paying around $150,000 per $1 million of coverage in the primary layer. That's about 18 percent or so of the amount covered, and I'm told to brace for closer to 40 percent — or $400,000 for a million in coverage — next renewal. And we're doing much better than other firms.
"I wouldn't be surprised to see some banks take a $200 million deductible," he adds. "Carriers are simply uncomfortable insuring the primary layer of troubled firms unless it's nearly a dollar for a dollar. At that point you might as well self-insure."
The Last Details
Nevertheless, insurance brokers insist that stable and reputable firms — the two-thirds not named in securities litigation — can reap much better D&O deals than their distressed brethren. "With a lot of hard work, you can differentiate yourself with underwriters and still do reasonably well," says William A. Boeck, a senior vice president of the Lockton Financial Services group at insurance brokerage Lockton Cos.
To get a break, commercial firms should demonstrate the merits of their liquidity, debt obligations, balance-sheet soundness, and other financial metrics. "If your story is a really good one, there is still a chance of a flat renewal," says Lou Ann Layton, a managing director at global insurance broker Marsh. "If you didn't take TARP money you have something to boast about [to insurers]. If you took it but can show you really didn't need it, you can still distinguish yourself. That's the key."
That's what Russell Investments did. "You need to determine the issues the insurance markets are concerned about and then position your risk- control system and business model as being different," says global risk manager Jeffrey Vernor. "If you don't have known claims problems, there is little evidence to warrant a significant D&O premium increase." Nevertheless, Vernor acknowledges that the firm's D&O premium at renewal increased slightly. "It wasn't flat, but it was reasonable," he says.
Bank of New York Mellon fared even better, renewing its D&O policy at the same premium in its expiring policy. "We differentiated ourselves by pointing out that we're not a commercial bank per se," says Carmelo Casella, vice president of corporate insurance. "Since our merger with Mellon and the sale of our retail branches to JPMorgan Chase, we've focused on asset management, securities servicing, and treasury services. We also don't have much subprime exposure, particularly relative to others in the banking industry, and even though we got TARP money, we took only $3 billion and not $25 billion like other firms. Our capital ratios remain strong."
Warren Mula, chairman of insurance broker Aon 's U.S. retail business, has additional advice. "It's vital for the CFO to make an appearance during the renewal process," he says. "A CFO is best-equipped to convey to underwriters that this is an organization that anticipates problems, knows where its risks are, is very closely managed, and would not bear a risk that falls outside its own and industry best practices."
Better days may lie ahead. Significant decreases in D&O litigation are anticipated, if for no other reason than all the big fish have already been reeled in. "Litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up," says Grundfest of Stanford Law School's clearinghouse. A single D&O market for all industry sectors may yet rise again.
Russ Banham is a contributing editor of CFO.
Mix and Match
Many companies renewing their directors'-and-officers' liability insurance programs this year are moving around the key players in their layered D&O programs to shift the burden of risk from troubled insurers to more financially viable ones. Since D&O insurance policies typically carry very high financial limits (in the hundreds of millions of dollars), no one insurer can bear all the risk, requiring several to pitch in and share potential losses. "Diversification, at the moment, seems generally like a good idea," says Patrick Regan, CFO of global insurance broker Willis Group.
Other brokers offer similar advice. "We're counseling clients to reduce, reallocate, or remove from their D&O programs any insurance companies that have been downgraded by the rating agencies in the past 12 months," says Lou Ann Layton, managing director at insurance brokerage Marsh.
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