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Column
What goes around comes around: Important signs are pointing to a softening in the D&O insurance market. By Stephen J. Weiss By all key measures, the hard market is softening. This observation is based on negotiating nearly 50 D&O insurance policies in recent months and is consistent with the views of experienced brokers interviewed for this column. While 50 policies may not constitute a statistically significant sample, this report on our experience has the virtue of being current, which is very important. Why is timeliness important? Ask any risk manager going into renewal negotiations in the next few weeks. He needs current information to better judge the terms of the quotes presented by the company’s brokers, particularly premium rates. Such information also allows him to more accurately guide top management’s expectations about the cost of the company’s D&O program for the coming policy year. What signs identify a softening D&O insurance market? Flat or decreasing premiums are key. Other signs are higher policy limits being offered to individual companies and insurers’ willingness to negotiate coverage enhancing endorsements. Premiums. Instead of the heart stopping increases of the past few years, we have been seeing decreases in the amount of renewal premiums on primary policies, in some cases between 10% and 30% less than a year ago. The same is true for excess policies. Premium rates are dropping as measured by their percentage of the immediately underlying layer (called the increased limits factor). In 2003, the increased limits factor was as high as 95%. In May 2004, to cite one example, the increased limits factor on each of the four $10 million layers of a client’s $50 million D&O insurance program was only 75%. Higher Limits. High-limit policies were frequently written in the soft market of the late 1990s. A large insurer might write $35 million or more of D&O insurance for a single company. For example, Associated Electric & Gas Insurance Services Ltd. wrote a $35 million primary policy for Enron Corp. for the policy year ended September 1, 1999. In the subsequent hard market that began surfacing in 2001, insurers decided not to put too many eggs in one basket. Insurers with the capacity to write up to $50 million per account might write only $10 million. We have seen a turnaround, however, with recent renewals. An insurer that would write only a $10 million primary policy a year ago offered $15 million of limits. Another insurer on the program that would write only a $5 million excess policy last year has offered to put up twice that amount. Not quite the good old days, but a meaningful shift of direction. Insured-Friendly Terms. Some policy enhancements negotiated over the past several months were out of reach last year. Did we become more effective negotiators in recent months? I would like to say that, but the more likely explanation is that the market has been softening. Perhaps the best way to support this point is to quote from communications we received from insurers at the conclusion of negotiations that had resulted in significant coverage enhancements. One insurer (let’s call it “ABC Insurance Co.”) felt compelled to express this caution: “We deem it necessary to point out that the changes to which we are agreeing are not meant to be institutionalized across future new business and renewal submissions.” The underwriter on the second account sounded a similar refrain: “We will make an adjustment for this one particular situation. Please note, however, that this should not create a precedent for other accounts.” There was not much need for insurers to issue such cautions in 2003. One of the provisions negotiated out of ABC Insurance Co.’s policy was an odious appeals clause. This provision gives an insurer the right to insist that a judgment against the insured be appealed, even if the insureds vehemently object. Insured persons and their company are concerned about a future nightmare scenario in which, just when they are breathing a sigh of relief because three years of litigation are finally over, they can be directed by the insurer to put on the boxing gloves again for an appeal and perhaps another trial with the attendant possibility of an increased award. Assuming no adverse changes in your company’s risk profile by virtue of claims activity, financial restatements, or otherwise, I suggest that you go into negotiations for your D&O insurance with the expectation that, as compared to a year ago, the premium will be lower, the increased limits factor between insurance layers will be smaller, coverage enhancements will be more negotiable, and higher policy limits will be available. |
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J. Weiss is a partner in the law firm of
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