Risk Management

Premiums Soar for Directors

The most-common source of claims: employees.
Stephen TaubFebruary 4, 2004

The rash of corporate scandals and recently established legal exposure for directors under Sarbanes-Oxley have driven up the price of liability insurance for boardroom officials.

Last year, premiums for directors’ and officers’ (D&O) liability insurance rose an average 33 percent, on top of a 29 percent increase in 2002, according to a survey by actuarial consulting firm Tillinghast-Towers Perrin.

What’s more, said Tillinghast, 70 percent of U.S. respondents reported an increase in premiums compared with their prior policy, while only 19 percent reported a decrease. Yet even so, there are hopeful signs that the market could stabilize in 2004. It turns out that 62 percent of 2,139 U.S. survey participants with renewals reported a premium increase in the third quarter, compared with 76 percent in the third quarter of 2002.

“While many companies are still seeing increases in D&O premiums, the proportion of participants reporting increases declined in the last half of our survey period,” said Tillinghast survey leader Elissa Sirovatka.

The survey also found that capacity levels were at their lowest since 1997, but that most companies did not feel the effects. For the 11th consecutive year, reported Tillinghast, less than 5 percent of all U.S. participants not purchasing D&O coverage made their decision because coverage was completely unavailable to them. “Though 2003 capacity was low, we believe it has reached a bottom and will increase in 2004,” said Sirovatka.

The most common source of D&O claims: employees. In 2003, 91 percent of D&O claims against nonprofit organizations were brought by employees. At for-profit companies with fewer than 500 shareholders, 50 percent of these claims were brought by employees; at companies with more than 500 shareholders, the figure was 24 percent. Employment discrimination (40 percent) was the most frequently cited employment-related claim, followed by wrongful termination (24 percent).

Tillinghast anticipates the following developments for 2004:

  • Capacity will increase after bottoming in 2003, as new entrants join the market.
  • The market will remain hard, despite the increase in capacity. Some industry sectors will still experience increases of 30 percent or more even though premium increases will stabilize overall.
  • There will be a narrowing of coverage, primarily during the first half of the year, involving more-restrictive coverage forms and more exclusions imposed by carriers.
  • Regulations imposed by Sarbanes-Oxley will likely make buyers more concerned about carrying enough coverage. However, insurers will be concerned about an increase in claims and may become more selective in offering coverage limits.

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