Risk Management

D&O Insurance Prices Soften, Survey Says

But the disconnect between pricing and actual claims experience may signal a market tightening to come.
Stephen TaubJanuary 27, 2006

Although legal actions against corporate directors and officers have mounted in the past two years, the market for D&O liability coverage has continued to soften, according to a recent survey.

Indeed, claim frequency surged 30 percent from 2004 to 2005 and claim susceptibility increased 6 percentage points among repeat participants in the survey, which was conducted by Tillinghast, a risk-management consulting firm owned by Towers Perrin. (Claim frequency is the average number of claims per company, while claims susceptibility is the percentage of participants that reported one or more claims.) This year’s survey, covering 2005, included participants from 2,694 U.S. and Canadian companies.

At the same time, Tillinghast’s D&O Premium Index fell 9 percent in 2005, after dropping 10 percent the previous year. The index represents the average D&O premium of a typical U.S. for-profit company

Among repeat participants in the survey, the average premium fell 8 percent in 2005 compared with the previous year. Premium increases, however, were split evenly: 37 percent of 2005 survey participants reported a premium increase; 37 percent reported a decrease; and the remaining 26 percent reported no change.

The survey also found that the average policy limit (the maximum amount of coverage available) for U.S. for-profits was $14.3 million. In the previous year’s survey, the average limit was $13.6 million.

The disconnect between pricing and actual claims experience may signal a market tightening to come, however. “It’s surprising that premiums have continued to decline while all other factors driving insurers’ D&O costs are on the rise, ” says Jim Swanke, managing principal for Tillinghast’s strategic risk financing practice. “We see a need for more appropriate pricing of these risks.”

In contrast to the situation following the wave of corporate scandals at Enron, WorldCom, and elsewhere, coverage strictures continued to loosen. In 2003, by contrast, the percentage of U.S. companies experiencing decreases in policy exclusions and increases in enhancements was on the decline. That trend had held steady since 1998.

In 2005, however, 25 percent of U.S. participants reported increased enhancements, up from 13 percent in 2004 and 5 percent in 2003. Further, for the second straight year, 10 percent reported fewer exclusions, up from 2 percent in 2003 and 3 percent in 2002.