statistical trends in the d&o marketplace 2004 plus d&o symposium moderator:phil norton,...
TRANSCRIPT
Statistical Trends in the D&O Marketplace
2004 PLUS D&O Symposium
Moderator: Phil Norton, President – Gallagher
Panelists: Dave Bradford, EVP – Advisen
Elissa Sirovatka, Consulting Actuary – Tillinghast
Vincent Caracciolo, VP – Liberty
John Kuhn, EVP – Axis
Keith Thomas, SVP – Zurich
Wednesday, February 11, 2004
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
The Post-PSLRA Dynamic• The cost of “doing business” is suddenly up 40%• Entity coverage works but some clients become less
interested in their litigation• The backlog of cases mount• Significant losses become a reality• Carrier reserves were inadequate
– But market holds onto excess capacity as competing carriers are slow to recognize losses and increase reserves (and prices!)
• Loss ratios fall out of the money – far out!
The “Not So Perfect” D&O Storm• D&O insurers continue to be concerned about their reserves for D&O losses;
key drivers for the hard market have been:
Increased Severity of Claims- including Mega claim settlements
Increased Frequency of Claims- legal costs rising dramatically
Reinsurance Market Issues - effectively decreasing market capacityFinancial Scandals
- adding fuel to the fire!
2003 Tillinghast D&O Survey
• 2,068 U.S. companies responding (and 71 Canadian)• 15 business classes, with largest representation from
technology, biotechnology & pharmaceuticals• About 14% of the U.S. participants have over $1
billion in assets, and about 42% are publicly traded• Measuring D&O trends since 1973
2003 Tillinghast D&O Survey Results
Signs of Continuing Hard Market Conditions
• Premiums increased significantly• Policy limits stable for most, but small decrease
on average• Deductibles/retentions level or increasing• Enhancements taken away• Exclusions still an issue• Capacity declined
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
D&O Class Actions• Frequency – Reasonably Level
– 212 in 2003– “Adjusted” prior 5-year average of 211
• Severity– D&O Claim Costs have tripled since 1997, with
sources such as Cornerstone Research estimating average securities claim costs in the range of $25 million.
– “Mega-claims” are the new reality
Frequency Trends – “Adjusted”
Federal SEC Class Action Litigation(Source: Stanford Law School website)
050
100150200250300
Year
No
. o
f S
uit
s
Recent Large D&O Claim Settlements*• Cendant Corp. $2.83 Billion• WorldCom $750 Million• Lucent Technologies $631 Million• Bank of America $490 Million• Waste Management 2 $457 Million• Oxford Health Plans $300 Million• Daimler Chrysler $300 Million• 3com $259 Million• Computer Associates 1 $230 Million• Waste Management 1 $220 Million• Rite Aid $200 Million• Digex $165 Million• Dollar General $162 Million
• American Continental $157 Million• Dayton Power & Light $146 Million• Rexene $145 Million• Informix $142 Million• Computer Associates 2 $135 Million• Sunbeam $125 Million• Mattel $122 Million• Conseco $120 Million• Philip Morris $116 Million• IKON Office Solutions $111 Million• Prison Realty Trust $104 Million• MicroStrategy $103 Million
*Estimates may be subject to change
The Undiscovered Country
• Hundreds of open claims may be typical, but
• 45
• Claims alleging damages in excess of $1 billion!
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
Defying GravityCost of Risk Compared with Insurer Results 1990-2003
6.4
4.83
6.46
8.918.3
7.7 7.3
6.49
5.7 5.25.71
5.25
6.1
11.96101.5%
90.6%
101.1%
94.4%
91.3%
89.3%
84.5%
90.7%
94.2%
96.0%
95.9%
91.3%
90.0%
3
4
5
6
7
8
9
10
11
12
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Co
st o
f R
isk
84.0%
86.0%
88.0%
90.0%
92.0%
94.0%
96.0%
98.0%
100.0%
102.0%
Ove
rall
Op
erat
ing
Rat
io
Source: A.M. Best, Advisen/RIMS Benchmark Survey Database
InsurerOperatingRatio
Cost ofRisk
Average Annual Tillinghast D&O Premium Index Increased 33%
Median is increasing less than average implying that some organizations were hit with much greater premium increases.
-20%
-10%
0%
10%
20%
30%
40%
50%
1995 1996 1997 1998 1999 2000 2001 2002 2003
Median
Average
Premiums were up for all classes, including private company and not-for-profit sectors
U.S.U.S. CanadaCanada
70%
20%
10%
89%
7%
4%
Increased
Decreased
Same
Changes in Premium from Prior Year
Majority of participants reported increases in premium during the second half of 2002 and first half of 2003
Source: Tillinghast 2003 D&O Survey
Premium Trends
• 33% @ 42% => 80%
• 135,115,50,25 => 80%
• 3 Years Worth => 5.2X
Typical D&O Percentage Increases
0
50
100
150
200
250
Overall MarketTech D&O Mkt
Publicly Traded Companies
Directors & Officers LiabilityPercentage Change in Average Premium at Renewal
0.0%20.0%40.0%60.0%80.0%
100.0%120.0%140.0%160.0%180.0%200.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from 2000 2002 from 2001 2003 from 2002
Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
Management Liability Premium Change at Renewal
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
22
00
1 f
rom
20
00
q1
20
01
fro
m 2
00
0
q3
20
02
fro
m 2
00
1
q1
20
02
fro
m 2
00
1
q3
20
03
fro
m 2
00
2
q1
20
03
fro
m 2
00
2
q3
Directors & Off icers Liability
Fiduciary Liability
EPLI
Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
Percentage Change in Premium at Renewal
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from2000
2002 from2001
2003 from2002
Directors & OfficersLiability
Property - Domestic
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
Risk Transfer was Stable
QuarterQuarter IncreasedIncreased
Third Quarter 2002
Fourth Quarter 2002
First Quarter 2003
Second Quarter 2003
Third Quarter 2003
Total
16%
12%
13%
12%
13%
13%
Changes in Limits by Quarter— U.S.
DecreasedDecreased
16%
20%
13%
12%
13%
14%
SameSame
69%
68%
74%
76%
74%
73%
For the most part, insureds maintained their policy limits.
Source: Tillinghast 2003 D&O Survey
Retentions Continued to Rise
QuarterQuarter IncreasedIncreased
Third Quarter 2002
Fourth Quarter 2002
First Quarter 2003
Second Quarter 2003
Third Quarter 2003
Total
55%
58%
45%
38%
27%
44%
Changes in Retentions by Quarter — U.S.
DecreasedDecreased
20%
11%
15%
11%
11%
13%
SameSame
25%
30%
40%
51%
61%
43%
But fewer and fewer insureds are reporting increases in deductibles/retentions since the 4th quarter of 2002.
Source: Tillinghast 2003 D&O Survey
Directors & Officers LiabilityPercentage Change in Average Retention at Renewal
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from 2000 2002 from 2001 2003 from 2002
Source: Advisen/RIMS Benchmark Survey Database
Another View of Changes in Retentions
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
Enhancements Difficult to Maintain
12%
17%
12%
1%
5%
8%
18%
22%
37%
53%
0% 20% 40% 60% 80% 100%
2003
2002
2001
2000
1999
1998
Changes in Enhancements by Survey Year
Decrease
Increase
0
0
Continued evidence of coverage roll backs, but not as bad as previous year.
Source: Tillinghast 2003 D&O Survey
Exclusions Still an Issue
2%
3%
3%
25%
17%
21%
1%
1%
1%
1%
0% 20% 40% 60% 80% 100%
2003
2002
2001
2000
1999
1998
Changes in Exclusions by Survey Year
7%
14%
Decrease
Increase
Nearly one in five insureds saw the imposition of additional exclusions.
Source: Tillinghast 2003 D&O Survey
The Hard Market Good News• Coverage “take-aways” were not as severe as in the
previous hard market• Major issues revolve around:
– Entity Coverage versus Pre-determined Allocation– Discovery Clause restrictions– War, Terrorism or even Mold exclusions– Deletion of retention waivers– Lower automatic subsidiary coverage thresholds– Severability
Overall D&O Coverage Trends
0.75
1
1.25
1.5
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
N-B Coverage Index
Norton-Bastian D&O Coverage Index
Risk Financing Alternatives
• Large Deductible Programs• A-side Only• Blending A-side only and full coverage• Blending D&O with other lines of coverage• Group Captive formation• Finite Risk• Self Insurance — including Indemnification Trusts,
Single Parent Captive, and Financial Markets Vehicles
“A-side” Alternatives to consider
• All Side-A Program– Very rare because they are not cost effective
• Side-A excess over full coverage– Vanilla products are ok (unless you asked for chocolate!)
• Side-A “excess & DIC” over full coverage– Delivers quality – but at a price
• Independent Directorship Liability– Often too much money to not insure “the buyer”
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
The Market Is Not Differentiating Among Risks
Polices rated byinsurer pricing schedule
Actual marketpricing of same policies
Source: Advisen/RIMS Benchmark Survey Database
The Market Is Not Differentiating Among Risks
0 10 20 30 40 50 60 70 80 90 100
0.3
0.2
0.1
0.0
ISS Industry CGQ
Premium/Revenue
Source: ISS, Advisen/RIMS Benchmark Survey Database
Normalized Primary Premium/Revenue to ISS Industry CGQ
The Market Is Not Differentiating Among Risks
Board Effectiveness Rating
Premium/Revenue
Source: Corporate Library, Advisen/RIMS Benchmark Survey Database
0.3
0.2
0.1
0.0 D C B A
Normalized Primary Premium/Revenue to Board Analyst Board Effectiveness Rating
Well, Maybe a Little...
S&P Rating
Premium/Revenue
Source: Standard & Poor’s, Advisen/RIMS Benchmark Survey Database
B- B+ BB BBB- BBB+ A AA-
0.10
0.05
0.000
Normalized Primary Premium/Revenue to S&P Credit Rating
Well, Maybe a Little...
Consumer DiscConsumer StapFinancialsHealth CareIndustrialsITMaterialsTelecomUtilities
0 100 200 300 400 500
Median Pure Premium ($000)
800
700
600
500
400
300
200
100
MedianPolicyPremium($000)
Source: ISS, Advisen/RIMS Benchmark Survey Database
Median Primary Policy Premium to Median SCAS Pure Premium
Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
Capacity Declined in 2003 to the Lowest Level Since 1997
1,350
1,500
1,550
1,575
1,550
1,500
1,350
1,155
895
835
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Full Limits Capacity (in millions) — U.S., For-Profit Only (Source: Tillinghast)
The Reinsurance Market
• Still Difficult:– Initially driven by the 9/11 tragedy– Renewals are newsworthy– Aggregation concerns - will it happen again?– Insurer vs. reinsurer loss ratios– More intrusion and restrictions; fewer exceptions– More net lines translates into:
– => more Caution with limits offered– => => an effective reduction in capacity– => => => less competition
Calm in the Storm? - New Capacity
• Brokers maintaining 47 D&O carrier relationships, including several newer ones
• $300 million capacity is readily available for a difficult risk and much more for a better risk
• But carriers still very reluctant to use their full capacity on most risks
Changes in Market Players
Traditional D&O underwriters losing share… …while new entrants grow in significance
D&O Market Share by YearNew Market Entrants
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2000 2001 2002 2003
AWAC
Arch
Axis
D&O Market Share by YearTraditional Markets
0%
5%
10%
15%
20%
25%
30%
35%
2000 2001 2002 2003
Chubb
AIG
Hartford
Zurich
Travelers
Source: Advisen market data
“Please Lord, give me another hard market. I promise not to blow it this time.”
Sign on underwriter’s desk, circa 1989