The days of cutting out unethical executives from a directors and officers policy after they are uncovered is gone, said an insurance brokerage executive, and buyers need to figure out how to deal with these people before the policies are in place.
Speaking during a Webcast sponsored by Willis Group Holdings yesterday, Ann Longmore, D&O product leader for Willis, said the issue of excluding dishonest executives from the company's D&O policy needs to be done as the policy is written.
"We are no longer in a world where if, during the policy period, we have a bunch of rogue individuals, we can carve them out from the D&O policy and cut them off from accessing the proceeds," said Ms. Longmore. "You need to consider these issues up front as they relate to the personal conduct disclosures.
"We are in a time of an unprecedented number of executives who are either cooperating in criminal investigations or entering plea bargains and guilty pleas. How do you want them treated on your D&O policy?" she asked.
She noted that despite a guilty plea, the executive is still eating up the coverage of the D&O policy.
A guilty plea, she pointed out, is not indemnified, and the executive would then be covered under the D&O policy's A-side (coverage extended to an executive that a company can not indemnify).
There are also issues to be considered over the layering of the coverage and the difficulty involved in recoveries when the policy limits get into the excess layers.
"If we have eight or 12 layers, we have to really search for a better way to do this," Ms. Longmore said, explaining the primary insurer may see that coverage limit quickly reached, but the excess carriers would be dealing with long-tail claims they never intended to experience.
International D&O policies are also becoming more complicated, Ms. Longmore noted, and require more planning and understanding of foreign regulations to ensure coverage can be extended to executives in other countries.
Webcast moderator Gordon Prager, Willis Risk Services, risk management consulting, asked about the capitalization of risks by the capital markets.
Pamela Ferrandino, casualty practice leader for Willis, said those markets are becoming significantly more important to the property market than the casualty market. They are taking on short-term risks and will continue to do so as long as they are receiving profitable returns.
In response to a question about the reaction of the insurance market to a benign hurricane season, Suzanne Douglass, Willis property practice leader, said Willis believes there will be some stabilizing in the catastrophe property market, after a year of triple-digit increases, with moderate increase in capacity.
Tom Coughlin, chief executive officer of Willis Risk Solutions, said the industry is on track to have a spectacular year, after a year of rebuilding, with a combined ratio in the first half of the year of around 92 percent and a return on surplus of 13 percent, the best recorded since 1955, according to the Insurance Information Institute.
A replay of the broadcast, "Adaptation, Innovation and the Insurance Marketplace," is available online at www.willis.com/Extras/webcasts.aspx, by calling 866-434-5276, or internationally, 1-203-369-1014.
A companion publication is available for download at www.willis.com/Extras/Marketplace%20Realities.aspx
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