At Aon Financial Services Group in Denver, National Director Michael Rice, speaking on a Sept. 22 conference call, introduced a new product designed to help customers keep existing carriers on D&O programs while protecting themselves against the possibility of any one of them becoming insolvent.

Earlier this month, Jennifer Fahey, Aon's national D&O practice leader in New York, described the product known as Aon Flex D&O to NU. She explained that it basically provides excess capacity that sits on top of an existing D&O program, which can also drop down to take over the coverage obligations of an insolvent or financially impaired slow-paying underlying carrier.

She said the product is primarily targeting publicly traded commercial clients, although there has been some consideration of coverage for financial institutions as well, and that Aon is putting together proposals for $25 million, $50 million and even higher limits in some cases. While the product was initially created for D&O insurance, Aon is also obtaining proposals for professional, fiduciary and employment practices liability, as well as crime insurance, she noted.

The concept behind the product is similar to the drop-down feature of Side-A excess and DIC (difference-in-conditions) policies that have been introduced to the world of D&O insurance in recent years. Ms. Fahey said, however, that one important difference is Side-A policies respond only for non-indemnifiable losses (where a corporation can't indemnify directors because of statutory prohibitions in a state, because the corporation is financially impaired, or for some other reason).

“The Flex product, while it's built on that construct, is carried through relative to Side-B and Side-C exposure, also,” Ms. Fahey explained, referring to the indemnifiable loss and entities' securities claim coverage parts of a D&O policy.

In a separate interview, Michael Turk, senior consultant for Towers Perrin in Stamford, Conn., told NU that more than 75 percent of all D&O claims are Side-B or C, rather than Side-A claims.

Ms. Fahey said insurers that have agreed to participate on Aon Flex programs will step into the shoes of insolvent carriers at the same terms and conditions, so there are no breaches of continuity.

From a buyer's perspective, she said there's been a great deal of interest so far.

“The quality of relationships relative to primary and low-excess D&O insurance is quite considerable. As a result, there is reluctance to terminate those relationships, which represent a considerable investment of time over multiple renewals,” she said, reporting that more than 30 percent of all Aon's D&O Fortune 1000 renewals are seriously considering a Flex option as part of an upcoming renewal.

To date, Aon has provided over 30 formal quotes, bound two, and expects to bind another five-to-10 shortly, she said.

While price determinations vary considerably, since underlying programs and risk profiles are extensively underwritten by participating carriers, Ms. Fahey said the cost in many cases “represents a significant percentage of the [price of the] lowest concerning layer”–in other words, the one that buyers would be most worried about.

Asked why insurers might have been reluctant to offer this kind of coverage before, she said “we have encountered some concerns on the part of insurers who did not want to be perceived as offering a crutch to a troubled insurer that they hoped to quite honestly take out of the market.”

“In other words, they want that layer. They want that relationship. They don't want to strengthen a troubled insurer,” she said.

Still, 10 D&O insurers have currently agreed to participate on Flex deals, varying from large, established D&O insurers to smaller and newer insurers, including from the United States, Bermuda and Europe.

In a separate announcement on Oct. 22, Bermuda-based Argo Group International Holdings Ltd. said it launched a similar product known as Sentinel to the London market through a new unit known as Argo Financial Products, which targets non-U.S. domiciled insureds with limits up to $20 million.

The Sentinel product, “designed to provide protection in the event of insurer failure,” also responds automatically when Standard & Poor's or A.M. Best insurer financial strength ratings drop “below investment grade,” or at the option of the insured in the event of any downgrade by either of the rating firms. (Editor's Note: The final feature of Sentinel is similar to a D&O option developed by Los Angeles-based wholesaler Executive Perils. See NU, Sept. 29, page 10 for details.)

In spite of these developments, Ms. Huskins at Woodruff-Sawyer reported different carrier responses to recent events.

“We actually are seeing very good carriers saying they will not write over some other carriers. That's the opposite [of carriers participating on products that would basically have one] carrier insuring another carrier's balance sheet,” she said.

Agreeing that there are situations where carriers “will do that for the right risk,” another issue for a carrier is that “it may be insuring another carrier, and in the process giving incredibly broad terms and conditions…Do you see how that removes control over their exposure?” she said, suggesting that this type of product could not become available on a broad basis for this reason.

For policyholders that aren't investing premium dollars in these new products just yet, brokers such as Ms. Huskins offer basic risk management advice. The fact that “a number of carriers face serious challenges reminds everyone of the importance of diversification,” she said.

“Some insureds now find themselves in a difficult position because the way they achieved year-over-year savings in insurance [premium] dollars may have been by consolidating coverage” with fewer carriers. “That may well have been the right decision [at the time, but] when you see newspapers screaming about carrier downgrades, it underscores that there was an exchange for the lower premium”–a trade-off in terms of diversification, she said.

All brokers interviewed by NU stressed the importance of evaluating the financial strength of D&O carriers but said relying on ratings alone is insufficient.

“We've all taken great comfort in ratings, and I think at this point in time clients are no longer willing to accept those at face value, and brokers similarly are digging deeper,” Ms. Fahey said, suggesting that both need to delve into the particulars of the insurer– their surplus and their reserves, their investment portfolios, the direction of the firm, and whether they're staffed to meet growth goals if they're newer carriers.

Ms. Huskins, who is less inclined to recommend newer carriers because of continuity issues that can develop if a carrier without proven staying power decides to abruptly exit the market, also said that size is an important consideration.

“A-minus VI or VII would be a bare minimum,” she said, referring to an A.M. Best size category of at least $25 million in annual premiums. “You want the bigger carrier for an overall sense of stability, but also because when a carrier starts being downgraded, it can be like a cliff [and] things come apart quickly.”

She added that “to give a corporation the maximum runway to make decisions, it's better to start with a carrier that's at a higher perch,” noting that there is also greater opportunity for larger downgraded carriers to right their ships.