D&O Liability:
What’s Happened and What’s Ahead
Elissa M. Sirovatka, FCAS, MAAA
Principal, Tillinghast business of Towers Perrin
CAGNY
June 1, 2005
©Towers Perrin
©Towers Perrin
The 2004 Tillinghast D&O Survey
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Participant Characteristics
 2,455 organizations
 15% increase in participation from 2003 survey
 2,409 U.S. /46 Canadian
 1,347 repeat participants
 Distribution by ownership:
Country
Public
Private
Nonprofit
U.S.
30%
52%
18%
Canada
50%
17%
33%
Participation increased significantly from our 2003 survey.
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The Current Marketplace
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The Current D&O Marketplace
 First premium decreases since 1999
 Capacity increased from 2003 level
 Coverage restrictions eased
At the same time…
 Frequency increased
 Claim severity increased
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First Premium Decreases Since 1999
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D&O Premium Index – U.S. For-Profit Only
Average Annual D&O Premium Index Decreased 10%
Year
Index
Median
Index
Average
1998
402
539
1999
356
503
2000
349
560
2001
397
720
2002
496
931
2003
562
1,237
2004
433
1,113
The median D&O premium index reached the
lowest point since our 2001 survey.
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Reported Change in Premium – U.S.
Change in Premium by Quarter – U.S.
61%
60%
54%
50%
50%
50%
35%
40%
28%
30%
36%
27%
19%
20%
50%
15%
14%
1st Qtr 04
2nd Qtr 04
12%
31%
18%
10%
0%
3rd Qtr 03
4th Qtr 03
Increased
Decreased
3rd Qtr 04
Same
Most participants reported increases, but
more are reporting decreases in 2004
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Change in Average Total Premium
By Ownership
2003
Survey
2004
Survey
%
Change
Public
$1,069,438
$893,683
-16%
Private
54,306
49,014
-10%
Nonprofit
68,121
26,175
-62%
Average total premium decreased from our 2003 to 2004
survey regardless of ownership.
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Change in Primary/Excess Premium for Public
Entities
0%
-5%
-2%
0%
-10%
Median
-13%
-15%
-20%
Average
-30%
Public -Primary
-30%
-25%
Public - Excess
Excess premium for publicly owned entities
decreased significantly more than primary
premium.
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-4%
-6%
Primary
Average
-45%
-50%
Private -
-35%
Median
-44%
-8%
0%
-5%
-10%
-15%
-20%
-25%
-30%
-35%
-40%
-45%
-50%
-19%
Change in Primary/Excess Premium for Private
and Nonprofit Entities
Private - Nonprofit Nonprofit
Excess
-Primary
- Excess
Primary and excess premium for private and
nonprofit entities decreased relatively consistently.
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Change in Average Total Limits Premium
Business Classes with
Decreases
Business Classes with
Increases
 Biotechnology & pharmaceuticals
 Banking
 Education
 Durable goods
 Governmental & other nonprofit
 Health services
 Merchandising
 Real estate & construction
 Nonbanking financial services
 Nondurable goods
 Personal & business services
 Petroleum, mining & agriculture
 Technology
 Transportation & communication
 Utilities
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Change in Average Total Limits Premium
Asset Size Groups with
Decreases
Asset Size Groups with
Increases
 Up to $10 million
 $10 million to $50 million
 Over $10 billion
 $5 billion to $10 billion
Most asset size groups experienced no significant change in
total limits premium.
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Capacity Increased
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Insurance Carrier Capacity
Full Limits Capacity (in millions) — U.S., For-Profit Only
1995
895
1996
1,155
1997
1,350
1998
1,500
1999
1,550
2000
1,575
2001
1,550
2002
1,500
2003
1,350
2004
1,500
0
500
1,000
1,500
2,000
Capacity increased 12%….back to 2002 level.
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Some of the New Carriers in our 2004 Survey
 Darwin
 Endurance
 Quanta
 Westchester Specialty
Those only providing capacity since 2000
 Arch Insurance
 AWAC
 Lighthouse Underwriters
 MaxRe
 Navigators
 OneBeacon
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Policy Limits and Deductibles/Retentions
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Reported Change in Limits – U.S.
Change in Limits by Quarter – U.S.
100%
81%
80%
83%
81%
77%
83%
60%
40%
20%
11%8%
16%
14%
8%
5%
12%
6%
10%8%
0%
3rd Qtr 03
4th Qtr 03
1st Qtr 04
Increased
Decreased
2nd Qtr 04
3rd Qtr 04
Same
More reported no change in limits in 2004
than 2003.
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Policy Limits Increased for Most Asset Sizes
Average Policy Limits by Asset Size and Survey Year
2003
Survey
2004
Survey
Up to $10M
$2.4
$2.5
$10M to $50M
5.2
6.4
$50M to $100M
9.2
10.0
$100M to $400M
16.0
16.1
$400M to $1B
26.8
24.7
$1B to $2B
37.7
34.3
$2B to $5B
54.8
55.9
$5B to $10B
75.0
88.4
Over $10B
126.2
158.2
Asset Size
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Change in Average Total Policy Limits
Business Classes with
Most Significant Decreases
Business Classes with
Significant Increases
 Banking
 Durable goods
 Governmental & other
nonprofit
 Petroleum, mining &
agriculture
 Merchandising
 Transportation &
communication
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Reported Change in Deductibles/Retentions –
U.S.
Change in Deductibles/Retentions by Quarter – U.S.
100%
80%
62%
60%
40%
31%
20%
69%
61%
33%
25%
69%
25%
6%
6%
6%
8%
3rd Qtr 03
4th Qtr 03
1st Qtr 04
2nd Qtr 04
67%
16%
11%
0%
Increased
Decreased
3rd Qtr 04
Same
A decreasing percentage reporting increases
in deductible/retentions in 2004.
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Coverage Restrictions Eased
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Changes in Enhancements by Survey Year
Increase
37%
1999 0%
62%
Decrease
22%
2000
Same
78%
18%
2001
70%
8%
2002
17%
76%
5%
2003
12%
85%
2004
2%
13%
85%
0%
20%
40%
60%
80%
100%
Market softening on enhancements after trend of reductions.
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Changes in Exclusions by Survey Year
Increase
1%
1999
14%
Decrease
85%
Same
1%
2000
92%
1%
2001
96%
21%
2002
3%
76%
17%
2003
2%
81%
4%
2004
10%
86%
0%
20%
40%
60%
80%
100%
Market softening on exclusions after trend of increases.
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Frequency and Claim Severity Increased
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Repeat Participants
 New section to survey
 1,347 participants – “Repeat Participants”
 Caution against comparing claim statistics between surveys due
to change in participants
 Repeat participant group increases credibility of comparisons
between surveys
 Characteristics of repeat participants similar to 2004 total
participants, but
 Larger
 Greater concentration on public/private
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Repeat Participants:
Claim Frequency and Susceptibility
Claim frequency and susceptibility over 10 year period
Susceptibility
Frequency
2003
Survey
2004
Survey
%
Change
18%
19%
+6%
.70
.78
+11%
Both susceptibility and frequency increasing for repeat
participants.
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Frequency/Susceptibility by Business Class
Most Significant Increases
in Susceptibility
Most Significant
Increases in Frequency
 Banking
 Banking
 Education
 Biotechnology &
pharmaceuticals
 Real estate & construction
 Technology
 Transportation &
communication
 Nonbanking financial services
 Real estate & construction
 Technology
Banking and real estate & construction are the only business
classes on this list and on the average premium increase list.
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Claimant Distribution by Ownership
100
90
Nonprofit
80
Private
Public
70
60
50
40
30
20
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Majority of nonprofit claims are from employees.
Majority of for profit claims are from shareholders.
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Repeat Participants: Average
Closed Claim Payment — Indemnity Only
Payments to Claimants by Type of Claimant
(excluding closed no pay)
2003
Survey
2004
Survey
%
Change
Employees/Unions/
Physicians
$220,491
$525,117
+138%
Competitors/Suppliers/
Contractors
1,154,000
1,440,000
+25%
771,702
N/A
N/A
Governmental/Other
12,877,500
6,503,333
-49%
Shareholder/Investors
10,668,600
11,936,944
+12%
Claimant Class
Customers/Clients/Students
Increases in 4 out of 5 claimant classes.
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Repeat Participants: Average
Closed Claim Payment — Defense Cost Only
Payments to Claimants by Type of Claimant
(excluding closed no pay)
2003
Survey
2004
Survey
%
Change
Employees/Unions/
Physicians
$129,814
$106,565
-18%
Competitors/Suppliers/
Contractors
214,333
225,723
+5%
Customers/Clients/Students
445,354
1,377,538
+209%
Governmental/Other
1,306,220
2,375,774
+82%
Shareholder/Investors
1,732,708
1,727,366
0%
Claimant Class
Increases in 3 out of 5 claimant classes.
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Percentage of Open Claims
Claim Disposition by Survey Year
Still Open
Awaiting Trial
Tried but Being
Appealed
2003
Survey
2004
Survey
%
Change
36%
54%
18pts
1%
2%
1pt
Percentage of claims open increased from 37% to 56% an
increase of almost 20 percentage points.
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Where is the D&O Marketplace Headed?
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Where Is the D&O Marketplace Headed?
 Continued upward pressure on frequency and severity
of loss
 Potential for reserve strengthening on prior years
 Continued rate decreases, but of a smaller magnitude
 Continued pockets of rate increases
 Leveling capacity
 Improving coverage terms
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Continued Upward Pressure on Frequency and
Severity of Loss
 Especially on publicly traded institutions
 Public attitudes towards corporate governance haven’t
changed.
 Headlines continue
 Merck
 Choicepoint
 GlaxoSmithKline
 Marsh
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Potential for Reserve Strengthening on Prior
Years
 Increase in percentage of open claims
 Still a number of potential mega claims to be settled
 Tyco
 Global Crossing
 Greatest potential for strengthening may be in the
reinsurance community
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Continued Rate Decreases
 …..but of a smaller magnitude
 Low single digits
 Private and nonprofits
 Most likely in excess layers for public traded
companies
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Continued Pockets of Rate Increases
 For some business classes
 Particularly business classes with increasing frequency
 Banking
 Biotechnology and pharmaceuticals
 Nonbanking financial services
 Real estate and construction
 Technology
 Some saw increases in 2004….could be safe in 2005
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Leveling Capacity
 No flood of new players as in prior years
 Reinsurers may be cutting back capacity to insurers
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Improving Coverage Terms
 Way for insurers to compete
 Expect
 Flat or slightly increasing limits
 Flat retentions/deductibles
 More increases in enhancements
 More reductions in exclusions
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Questions?
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