“We are not seeing a capacity crunch yet, but its getting more restrictive,” said Lance Dalzell-Piper, underwriter for Syndicate 435, which is managed by Faraday Underwriting Ltd., a Lloyds business owned by GeneralCologne Re. Mr. Dalzell-Piper specializes in D&O for U.S. companies or non-U.S. companies with U.S. exposures.

“Everything is tightening uppricing, terms and conditions. The brokers have to work harder than they would have done,” said Mr. Dalzell-Piper.

He noted that underwriters are not offering the same limits as they did in previous years, when it was common to see a $20-25 million layer from some of the main carriers. “Those are tending to come down to $10 million or $15 million,” he said.

Edward Mrakovcic, European referral underwriter for GeneralCologne Re in Cologne, Germany, observed that underwriters are beginning to write securities entity coverage with coinsurance. (Securities entity coverage is designed to provide coverage to the insured corporation in the event of a lawsuit pursuant to alleged violations of U.S. securities laws.)

In some cases, he said, underwriters are excluding securities entity coverage entirely. “Ive seen one policy that actually appears to be quoted without a securities entity coverage clause, meaning that you go back to best-efforts allocation, which was the old way D&O policies were written” in the early 1990s.

(Under best efforts allocation, the insured corporation and the insurance company sit down and agree on how much of the claim is allocated to cover the directors and officers for their share of the loss.)

It is becoming clear to insurers that the lack of a coinsurance provision with regards to securities entity coverage left them at a bargaining disadvantage in the claims settlement process, Mr. Mrakovcic said.

“If, lets say, you had a $100 million policy and there was a claim for $50 million, there was a tendency for insureds to want to settle because the policy limits would pick it up fully,” Mr. Mrakovcic added.

On the other hand, if the insured has 20 percent coinsurance, that $50 million claim will cost the insured $10 million and the company may be more interested in defending the claim, he said.

Chris Hill, underwriter for Lloyds Syndicate 33, which is managed by Hiscox Syndicates Ltd. in London, said that over the past few years, D&O coverage had become very broad, for no additional premium and no coinsurance requirements. Mr. Hill also specializes in D&O coverage for U.S. clients or non-U.S. clients with U.S. exposures.

Sometimes employment practices liability coverage was also thrown into these policies, he said.

“D&O is a personal liability policy. Its there to protect the directors and officers personal liabilities; its not there to protect the corporate entitys own liability,” he said.

There is a growing realization on the part of D&O buyers with U.S. exposures that they are opening up their aggregate limits to erosion from claims brought from something that the policy was never intended to cover, he said.

“Its a brave risk manager that has to go back to his board of directors and say, oh, by the way, we just had our limits of indemnity eroded by some massive EPL claim, and youve got no D&O policy left to cover your personal liabilities should we have a securities action brought against us,” Mr. Hill said.

As the market evolves, underwriters may prefer a stand-alone entity coverage because then they have a better chance of pricing the product, Mr. Hill said, noting, however, that he hasnt yet seen that development.

Paul Bluck, director of the corporate liability unit of Aon Ltd. in London, said U.K. insurers are starting to look at their exclusions, especially for clients with U.S. exposures. Mr. Bluck specializes in U.K. publicly-listed companies, many of which have U.S. exposures, and places the business in the U.K. insurance company market.

U.K. insurers “seem to be concerned about the policy extension for outside directorship liabilities, which covers directors when they sit on other companies boards at the request of their employers,” Mr. Bluck said, noting there have been quite a few claims from such situations.

“Insurers over the recent years have given blanket coverage and not paid any great attention to charging additional money for it,” he said. “But now some insurers are saying, Were either going to take that cover out or you pay for it.”

Other than for distressed accounts or accounts with companies that are financially troubled, insurers are not generally walking away from D&O business, Mr. Bluck said.

“They often want to renew but they want more money for it, or they want to tweak the coverage a little bit,” he said.

Despite the general market tightening, Mr. Dalzell-Piper said, there is currently capacity available, which was aptly demonstrated by the fact that a major aircraft manufacturer was able to put together a $400 million D&O program, in spite of the fact that the same company recently settled a significant D&O claim. Mr. Dalzell-Piper declined to provide the name of the company.

“However, this is unlikely to be the case after Jan. 1, 2002, when there are many treaty renewals due in market,” he said.

Mr. Hill agreed that capacity may tighten further as D&O underwriters treaty reinsurance comes up for renewal and they find they have less reinsurance coverage and capacity to support their business plans.

This is also likely to affect a lot of mid-market facilities in the United Statesmanaging general agenciesthat offer D&O coverage and are backed by various reinsurers and insurers, he said.

Meanwhile, however, capacity is available for a price, said Mr. Hill. “Its a market like all markets. There are going to be carriers that are willing to take on business for what they think is a reasonable price.”

While there is a consensus that the market is tightening and underwriters are putting out smaller limits, “there are plenty of underwriters out there that are hungry for business, that actually are coming into the market” to take advantage of the hard market rates, said Martin Beagley, executive director of the global financial and executive risk practice of Willis Ltd. in London.

All market practitioners agreed that rates are rising, although the level of increase will depend on the risk and whether it has U.S. exposure.

Mr. Hill said that a U.S. high-tech company could see anything from a 100 to 250 percent rate increase, while standard manufacturing firms in the U.S., which are listed on the stock exchange, could see increases between 45 percent and 50 percent.

The European market has created fewer losses for underwriters than the U.S. markethence there will be lower rate increases for European companies with non-U.S. exposures. (See related story on 19)

Mr. Beagley at Willis affirmed that U.K. and European companies with no U.S. exposure may experience rate increases of five, 10 or 15 percent, compared with top-end rate increases of 300-400 percent for companies with U.S. D&O exposures.

“We have been seeing larger rate increases on excess layers which indicates a greater respect for the severity potential of this business,” Mr. Mrakovcic said.

Despite the increase in frequency and severity of D&O claims, Mr. Hill said that some buyers actually may reduce their aggregate limits purchased for D&O insurance in a post-World Trade Center market.

D&O “is not a mandatory insurance, while something like property insurance is. If theyre seeing 400 percent rate hikes in property insurance, thats going to squeeze the budget they have for other types of insurance such as D&O,” Mr. Hill said.

“Thats like employment practices liability insurance. Its a new insurance and some people may decide theyre not going to buy it any more, because they havent got the money for it or the budget for it,” he said.

Mr. Bluck at Aon said he hasnt seen buyers cut back on their D&O coverage limits, although he could envision that some companies may have budgetary constraints for their insurance programs.

“Its easier at the moment [to sell the D&O product] because were having more claims, so there is more justification for why you need the cover,” he said.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 3, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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