D&O symposium Discussion of D&O market conditions attracts insurance professionals By Phil Zinkewicz
More than 1,400 insurance professionals attended the PLUS 2006 Directors and Officers Symposium in February, where panelists discussed D&O market conditions for the securities industry, middle market business exposures and D&O policy provisions, among other topics related to the field. One panel, titled “Here We Go Again … Another Unprecedented Year of Securities Settlements And Claims,” was moderated by Tower C. Snow, Jr., a consultant with the California-based Clifford Chance US LLP. Panelists included members of the legal profession as well as a representative of the Securities and Exchange Commission. They were: Randi D. Bandman, partner in Lerach Coughlin, Los Angeles; Shirli Fabbri, partner in DLA Piper Rudnick Gray Cary, San Diego; Joan E. McKown, chief counsel for the Department of Enforcement of the SEC; Susan S. Muck, partner in Fenwick & West, San Francisco; and Ariana J. Tadler, member of Milberg Weiss Bershad & Schulman, New York City. Tower opened the panel discussion by ticking off securities claims activities in the D&O arena. He said that Enron has resulted in $7.7 billion in claims thus far and WorldCom another $7 billion in claims. He said that, in the United States, 89% of securities claims activity is related to financial statements and 39% is related to insider trading. He also said that in terms of mega cases—cases that generate $10 billion or more in claims—37 have been filed in New York, 25 in California and 10 in New Jersey. Tadler pointed out that the costs of dealing with directors and officers claims is on the rise. “One problem is that plaintiffs, defendants and the courts are deluged with electronic information,” she said. “We all remember the days when cases generated reams of paperwork, but today we have that plus a flood of electronic information that makes everybody’s job more difficult.” She also said that the “life cycle” of D&O cases is becoming longer. “In the past, the life cycle was one to three years. Today, it’s more like three to five years. Naturally, that causes costs to rise.” She also noted that the largest cases have to do with disgruntled institu-tional investors. Muck said that, since the passage of Sarbanes-Oxley, there has been a proliferation of internal investigations within public companies. These internal investigations are extremely costly when a public company employs outside auditors, she said. Moreover, new issues are emerging in these audits. “Issues that were not issues before are becoming issues now,” she said, adding that lawyers are coming into D&O lawsuits representing all parties. “Lawyers are feeding from the same trough,” she said. Speaking for the SEC, McKown said that 2005 was an “interesting year.” She said the enforcement division of the SEC is looking into cases of proper disclosure, financial fraud and insider trading. In addition, the SEC is focusing on executive compensation. “We’re not an advisory group, so we don’t tell companies what to pay executives, but we are demanding full disclosure. Of course, we have cases where the numbers are wrong, but also cases where the numbers are right but they don’t really reflect what’s happening within a company. What we are focusing on is the personal responsibility of directors and officers. We want to know what the board knew, when they knew it and what should they have known,” McKown said. Another panel, titled “The Dilemmas in the D&O Market . . . Where Do We Go From Here,” had Christopher Cavallaro, managing director of ARC Excess & Surplus, LLC, Garden City, New York, as its moderator. Panelists included: Greg Flood, chief operating officer, AIG/National Union, New York; Craig Landi, senior vice president, Arch Insurance Group, New York; Michael Sapnar, senior vice president and chief underwriting officer, Transatlantic Reinsurance Co., NewYork; Marc Siegel, director of research for CFRA, Rockville, Maryland; and Joseph V. Taranto, chief executive officer, Everest Re Group, Ltd., Liberty Corner, New York. Siegel said that CFRA is an equity research firm that endeavors to uncover the Enrons and WorldComs before they happen. He said his firm examined D&O insurance market performance from 1995 to 2004, the last year for which figures are available, and determined that the years 1998 to 2000 were the most unprofitable years for the industry, with 1998 alone generating $4 billion in losses.” Taranto concurred that the late 1990s to 2000 were “horrible” years for the D&O industry and that recent years were better but still questionable. “This is an area easy to get into, but difficult to price properly,” he said. This prompted Moderator Cavallaro to put forth, only half jokingly, the questions: “What are we doing in this business? Why is everybody willing to write D&O?” The panel was hard put to answer those questions directly. Taranto said: “Perhaps, it’s wishful thinking, that we believe we can outguess the other guy.” Sapnar reminded the audience that D&O is a relatively new product. “It’s been around since the sixties and seventies, but it was really in 1986 when the industry experienced large losses in the area that we recognized its volatility. So, if you really don’t know where you are, sometimes you become overly optimistic.” Interestingly enough, the volatility and unpredictability of the D&O market was addressed in a recent survey conducted by the Tillinghast business of Towers Perrin. Titled the “D&O Liability 2005 Survey on Claims and Insurance Purchasing Trends,” the survey showed that half of all public and private companies have received directors and officers (D&O) liability insurance inquiries from their board members. These results indicated that approximately 30% of nonprofit respondents have also received similar D&O inquiries from their board. In addition, 19% of public companies made changes as a result of inquiries versus just 5% of private and 2% of nonprofit respondents. Tillinghast’s survey, which included 2,694 participants, is the 28th in a series of studies on D&O liability claims and insurance purchasing trends. “The inclusion of directors and officers’ personal assets in the Enron and WorldCom settlements accelerated the number of inquiries from boards,” said Elissa Sirovatka, principal. “Board members now recognize their accountability and are questioning their own levels of coverage.” Tillinghast’s D&O liability insurance average premium index dropped another 9% in 2005 after dropping 10% in 2004. The median premium index reached the lowest point since 2001, while the average premium index has decreased 18% from its high of 1,237 in 2003. However, claim susceptibility (the percentage of participants that reported one or more claims), frequency (the average number of claims per participant) and severity continue to rise, much as they did in 2004, the survey found. “It’s surprising that premiums have continued to decline while all other factors driving insurers’ D&O costs are on the rise,” said Jim Swanke, managing principal for the Strategic Risk Financing Practice. “We see a need for more appropriate pricing of these risks.” According to this year’s survey, capacity leveled off in 2005, while coverage restrictions continued to ease. Consistent with last year, D&O insurance carriers provided approximately $1.5 billion in full limits capacity during 2005, while 99% of U.S. participants reported having D&O insur-ance. By the end of 2006, premium decreases are expected to flatten, and the amount of D&O coverage insurers write will state to decline, according to Sirovatka. Similar to 2004, competition remains fierce in excess layers for large public companies, where premiums for repeat participants dropped 10% in the excess layer and 8% in the primary layer. For repeat participants, the increase in average total policy limits was 9%, while the increase in average primary limits and average excess limits for this group was 2% and 11%, respectively, between 2004 and 2005. “Not surprisingly, the largest increase in limits was in the excess layer,” said Michael Turk, senior consultant. “However, premium decreases of a similar magnitude were reported in both the primary and excess layers. Given the increase in excess limits and increasing claim severity, it seems counterintuitive that there is a decrease in the excess layer premium.” The most significant soft market conditions were observed in the government and other nonprofits business class, followed by merchan-dising, technology, transportation and communication classes. Decreases are primarily driven by declining excess premiums, according to Tillinghast. Some pockets of hard market conditions remain, notably in durable goods, education, health services and non-banking financial services (e.g., insurance carriers and invest-ment banking.) Among 2003 to 2005 repeat participants, claim frequency increased 30% from 2004 to 2005 and claim susceptibility increased six percentage points. The average claim payment decreased for four of the five claimant classes reviewed in the survey (employees, competitors, customers and clients and other third parties) but increased for the claimant class with the highest average severity (shareholders). The claimant distribution continues to be heavily dependent on the ownership structure of U.S. survey participants. For example, 52% of the claims against public participants were brought by shareholders. In contrast, 92% of the claims brought against nonprofit participants were brought by employees. Claims against private participants were spread primarily among shareholders, employees and other third parties. More than half (56%) of claims against 2005 participants are still open, which is unchanged from last year’s survey. The large majority of the U.S. closed claims were closed by settlement (66%), while the percentage of claims closed by litigation decreased from 20% in 2004 to 10% in 2005. * |
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