D&O Insurance Premiums Fall in 2004

December 6, 2004 (PLANSPONSOR.com) - Tillinghast's Directors & Officers (D&O) liability insurance premium index dropped 10% in 2004, the first decline seen in five years.

Claim susceptibility, frequency, and severity are all still at high levels, according to the 2004 Directors & Officers Liability Survey, conducted by Tower Perrin’s Tillinghast. The softening of the market, according to the survey, is not due to a reduction in claims, but rather to the entrance of new capacity. The largest drops in premiums were seen for large public companies, according to the report, where rates are dropping anywhere from 10% -15%.

The number of participants reporting increases in deductibles or retentions was down significantly to 28% from 44%. Thirteen percent reported coverage enhancements, and 10% reported decreases in exclusions. Average policy limits increased for most asset classes on the year, with the exception of companies in asset classes $400 million to $1 billion and $1 billion to $2 billion, which saw decreases of 8% and 13% respectively.

Despite the overall softening, hard market conditions remain in banking, health services, real estate and construction, according to the report. Size also matters in whether pockets stay hard, with respondents in size categories of $10 million to $50 million and $5 billion to $10 billion reporting no decrease in premiums.

Capacity increased 11% from 2003, to $1.5 billion, according to the report. Ninety-nine percent of US participants reported having D&O insurance.

Among repeat participants, claim frequency was up 11% however. Claim susceptibility was up 6% on the year as well, with average severity also increasing in three of five categories. These categories were employees/unions/physicians, competitors/suppliers/contractors, and shareholders/investors. The sources of allegations were the same in 2004, however, with even charges of accounting fraud not increasing.

More than half (54%) of claims against participants in 2004 are still open, up considerably from last year’s 37%.

Canadian participants noted far more common increases, with 90% stating that they had seen such increases over the past five quarters.

The survey polled 2,455 companies in 15 business classes, and was conducted by Tillinghast, a unit of Towers Perrin ( www.towersperrin.com ), a global professional services firm.