Spring 2006 Midwest Actuarial Forum
D&O Liability: Where’s the Market Heading?
Elissa M. Sirovatka, FCAS, MAAA, Principal
March 17, 2006
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D&O market softening despite
continued increasing claims costs
 Average premium index decreased for second year
 Policy limits continued to increase
 Deductibles/retentions generally flat
 Coverage still easing
 Frequency increasing
 Shareholder claim costs increasing
 Capacity is leveling off
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Premium Decrease for Second Year
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Average annual D&O
premium index decreased 9%
Total Decrease Since Survey Year 2003: 18%
Survey 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
2005
401
1,010
The 2005 median D&O premium index is
at the same level as 1998 and 2001.
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Reported change in premium — U.S.
Change in Premium by Quarter
50%
40%
30%
20%
10%
0%
3rd Qtr 04
4th Qtr 04
Decreased
1st Qtr 05
Same
2nd Qtr 05
3rd Qtr 05
Increased
In total 37% of 2005 survey participants reported
increases, 37% reported decreases and 26% reported
no change in premium from their prior policies
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Repeat participants: Change in
average premium from 2004 to 2005 by layer
Repeat
Group
03-05
04-05
Layer
2004
Average
Premium
(000s)
2005
Average
Premium
(000s)
% Change
from 2004 to
2005
Primary
$145,392
$132,850
-9%
Excess
521,718
470,939
-10%
Total
310,527
284,626
-8%
Primary
$122,719
$113,640
-7%
Excess
549,392
492,911
-10%
Total
257,560
237,721
-8%
Average premium decreased 8% for both repeat groups,
with slightly more decrease in the excess layer
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Repeat participants: Change in average
premium from 2004 to 2005 by business class
Business Classes with
Decreases
Business Classes with
Increases
 Banking
 Education
 Governmental & Other Nonprofit
 Durable Goods
 Merchandising
 Non-banking Financial Services
 Nondurable Goods
 Petroleum, Mining & Agriculture
 Real Estate & Construction
 Technology
 Transportation &
Communication
Repeat participants in these business classes experience
decreases/increases regardless of repeat group
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Repeat participants: Change in
premium by asset size from 2004 to 2005
% Change 03-05
Repeats
% Change 04-05
Repeats
$0 to $10M
10%
-7%
$10 to $50M
-16%
-19%
$50 to $100M
-11%
-5%
$100 to $400M
-8%
-11%
$400M to $1B
-7%
-19%
$1 to $2B
-14%
-21%
$2 to $5B
-9%
2%
$5 to $10B
-21%
-27%
Over $10B
-24%
-18%
Asset Size
Decrease in average premium is seen across all asset sizes
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Average total premiums for public
participants are highest by wide margin
Average Total Limits Premium (in 000s)
by Asset Size and Ownership Type
Asset Size
Public
Private
Nonprofit
$0 to $6M
$200
$19
$4
$6 to $10M
280
18
7
$10 to $50M
319
36
20
$50 to $100M
433
89
38
$100 to $400M
579
102
131
$400M to $1B
783
121
202
$1 to $2B
1,035
181
263
$2 to $5B
1,699
330
649
$5 to $10B
1,830
438
N/A
Over $10B
3,802
1,087
N/A
Public premiums are five to ten times private and nonprofit
premiums for same size entity, according to our 2005 survey
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Policy Limits
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Reported change in policy limits — U.S.
Change in Policy Limits by Quarter
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
3rd Qtr 04
4th Qtr 04
Decreased
1st Qtr 05
Same
2nd Qtr 05
3rd Qtr 05
Increased
The majority of 2005 survey participants reported no
change in policy limits. Changes reported were more
likely to be increases than decreases.
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Repeat participants: Change in average
policy limits from 2004 to 2005 by layer
Repeat
Group
03-05
04-05
Layer
2004
Average
Policy Limit
(millions)
2005
Average
Policy Limit
(millions)
% Change
from 2004 to
2005
Primary
$4.99
$5.09
2%
Excess
20.60
22.85
11%
Total
11.57
12.56
9%
Primary
$4.36
$4.51
3%
Excess
22.17
24.41
10%
Total
9.86
10.75
9%
Average policy limits increased 9% for both 03-05 and 0405 repeat groups. The majority of the increase is in excess
limits.
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Repeat participants: Change in average policy
limits from 2004 to 2005 by business class
Business Classes with
Decreases
 Non-durable Goods (03-05
Business Classes with
Increases
 All remaining business classes
repeats only, -7%)
 Petroleum, Mining & Agriculture
(04-05 repeats only, 10%)
In general, all business classes experienced increases
in total policy limits, with the exception of non-durable
goods and petroleum, mining & agriculture
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Repeat participants: Change in average
policy limits by asset size from 2004 to 2005
% Change 03-05
Repeats
% Change 04-05
Repeats
$0 to $10M
15%
5%
$10 to $50M
5%
9%
$50 to $100M
16%
19%
$100 to $400M
3%
2%
$400M to $1B
2%
-4%
$1 to $2B
10%
-4%
$2 to $5B
11%
14%
$5 to $10B
-15%
-19%
Over $10B
-2%
0%
Asset Size
Increase in average policy limits are seen at smaller asset sizes, while
largest asset size groups experienced flat or decreasing policy limits
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Average total policy limits
for public participants are highest
Average Total Policy Limits (in millions) by Asset Size
and Ownership Type
Asset Size
Public
Private
Nonprofit
$0 to $6M
$8.20
$2.30
$4.54
$6 to $10M
13.35
2.45
2.11
$10 to $50M
15.81
3.87
3.89
$50 to $100M
16.49
5.96
5.14
$100 to $400M
19.36
7.76
12.55
$400M to $1B
27.18
12.76
31.57
$1 to $2B
41.00
17.57
28.14
$2 to $5B
73.89
29.09
32.50
$5 to $10B
89.78
27.00
N/A
Over $10B
139.47
36.00
N/A
Policy limits are highest for public organizations, according to our
2005 survey. But not by as wide a margin as total limits premium
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Deductibles/Retentions
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Reported change in
deductibles/retentions — U.S.
Change in Deductibles/Retentions by Quarter
80%
70%
60%
50%
40%
30%
20%
10%
0%
3rd Qtr 04
4th Qtr 04
1st Qtr 05
Decreased
Same
2nd Qtr 05
3rd Qtr 05
Increased
The majority of 2005 survey participants reported no
change in deductible/retention. Those who did report
a change were more likely to report an increase.
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Repeat participants: Change in deductible/
retention from 2004 to 2005 by business class
Business Classes with
Decreases
Business Classes with
Increases
 Biotechnology & Pharmaceutical
 Banking
 Government & Other Nonprofit
 Durable Goods
 Merchandising
 Education
 Non-durable Goods
 Health Services
 Technology
 Non-banking Financial Services
 Real Estate & Construction
 Utilities
Slightly more business classes experienced an
increase in deductible/retentions.
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Repeat participants: Change in deductible/
retention by asset size from 2004 to 2005
% Change 03-05
Repeats
% Change 04-05
Repeats
$0 to $10M
24%
-12%
$10 to $50M
-17%
30%
$50 to $100M
-24%
-18%
$100 to $400M
-11%
-12%
$400M to $1B
-9%
-28%
$1 to $2B
4%
5%
$2 to $5B
-5%
59%
$5 to $10B
-3%
4%
Over $10B
-10%
-10%
Asset Size
There is no obvious relationship between change in
deductible/retention and asset size for repeat participants
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Average total deductibles/retentions
are highest for public participants
Average Total Deductibles/Retentions (in 000s) by
Asset Size and Ownership Type
Asset Size
Public
Private
Nonprofit
$0 to $6M
$342
$39
$8
$6 to $10M
468
43
9
$10 to $50M
635
52
44
$50 to $100M
494
141
N/A
$100 to $400M
621
159
85
$400M to $1B
891
230
315
$1 to $2B
1,405
681
363
$2 to $5B
3,968
536
N/A
$5 to $10B
4,963
N/A
N/A
Over $10B
8,917
3,260
N/A
Deductibles/retentions are highest for public
organizations, according to our 2005 survey
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Coverage Restrictions Continue to Ease
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Changes in enhancements by survey year
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999
2000
2001
2002
2003
2004
2005
Survey Year
Same
Decrease
Increase
Market continues to soften on enhancements
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Changes in exclusions by survey year
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1999
2000
2001
2002
2003
2004
2005
Survey Year
Same
Decrease
Increase
Market continues to be soft on exclusions
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Frequency and Claim Severity
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2005 survey claim incidence
by asset size, for profits only
Participant Size
Susceptibility
Frequency
Up to $100M
13%
.21
$100 to $400M
40%
.70
$400 to $1B
32%
.64
$1 to $2B
34%
.88
$2 to $5B
40%
.82
$5B to $10B
45%
.83
Over $1B
40%
.76
All Asset Sizes
19%
.34
Susceptibility — percent of participants with one or more claims.
Frequency — average number of claims per participant.
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2005 survey claim incidence
by asset size, nonprofits only
Participant Size
Susceptibility
Frequency
Up to $100M
3%
.04
$100 to $1B
26%
3.11
Over $1B
48%
34.48
All Asset Sizes
6%
1.56
For nonprofits, susceptibility and frequency
increase with participant’s asset size
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03-05 repeat participants claim
incidence by asset size, for profits only
2004
2005
Participant Size Susceptibility Susceptibility
2004
Frequency
2005
Frequency
Up to $100M
14%
19%
.22
.30
$100 to $400M
39%
51%
.69
.95
$400 to $1B
27%
38%
.69
.87
$1 to $2B
48%
50%
1.22
1.57
$2 to $5B
50%
54%
1.39
1.35
$5B to $10B
36%
42%
1.07
.75
Over $10B
54%
35%
1.85
1.00
All Asset Sizes
20%
26%
.38
.49
Susceptibility increased for 03-05 repeats for all asset
sizes, except over $10B. Frequency increased for asset
sizes less than $2B and decreased for larger entities
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04-05 repeat participants claim
incidence by asset size, for profits only
Participant
Size
2004
2005
Susceptibility Susceptibility
2004
Frequency
2005
Frequency
Up to $100M
10%
16%
.16
.25
$100 to $400M
30%
47%
.51
.84
$400 to $1B
24%
40%
.55
.75
$1 to $2B
35%
45%
.90
1.29
$2 to $5B
43%
45%
1.23
1.09
$5B to $10B
33%
47%
.89
.93
Over $10B
58%
42%
1.63
.96
All Asset Sizes
15%
22%
.28
.40
Similar results to 03-05 repeat participants
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03-05 repeat participants average
payments to claimants by type of claimant
Claimant Class
2004 Survey
2005 Survey
$134,555
$80,775
Competitors/Suppliers/
Contractors
N/A
N/A
Customers/Clients/Students
N/A
N/A
Governmental/Other
N/A
5,352,449
Shareholders/Investors
5,333,667
5,264,167
All Claimants
$1,083,157
$1,063,394
Employees/Unions/
Physicians
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04-05 repeat participants average
payments to claimants by type of claimant
Claimant Class
2004 Survey 2005 Survey
Employees/Unions/Physicians
$142,152
$92,352
Competitors/Suppliers/
Contractors
1,232,000
610,000
Customers/Clients/Students
8,551,807
3,961,649
N/A
4,589,063
Shareholders/Investors
5,333,667
11,245,870
All Claimants
$1,091,614
$1,951,893
Governmental/Other
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03-05 repeat participants average
defense costs per claim by type of claimant
Claimant Class
2004 Survey 2005 Survey
Employees/Unions/
Physicians
$105,977
$50,985
Competitors/Suppliers/
Contractors
276,526
234,804
Customers/Clients/Students
965,087
1,477,595
Governmental/Other
5,558,903
2,954,526
Shareholders/Investors
1,725,893
1,187,261
All Claimants
$487,037
$469,013
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04-05 repeat participants average
defense costs per claim by type of claimant
Claimant Class
2004 Survey
2005 Survey
Employees/Unions/
Physicians
$105,637
$51,570
Competitors/Suppliers/
Contractors
276,526
211,704
Customers/Clients/
Students
878,897
1,429,836
Governmental/Other
4,684,702
2,851,269
Shareholders/Investors
1,763,792
1,278,537
All Claimants
$516,344
$500,470
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Claimant distribution by ownership
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Public
Private
Shareholders
Employees
Nonprofit
All Other
Shareholder claims are the most frequent for
publicly owned entities while nonprofit entities’
claims almost always come from employees
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Board Member Inquiries
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Board member inquiries
about D&O coverage — by ownership
Percent of Participants Reporting D&O Inquiries
Nonprofit
Private
2%
29%
5%
52%
19%
Public
50%
% of participants reporting D&O Inquiries
% reporting coverage changes
Public and private entity board members more likely to inquire about
D&O coverage. Inquiries from public entity board members are most
likely to result in coverage changes.
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Board member inquiries
about D&O coverage — by asset size
Percent of Participants Reporting D&O Inquiries
30%
Over $10B
64%
13%
$5 to $10B
67%
30%
$2 to $5B
53%
26%
$1 to $2B
58%
30%
$400M to $1B
65%
24%
$100 to $400M
59%
9%
$50 to $100M
51%
9%
$10 to $50M
%6 to $10M
$0 to $6M
56%
2%
20%
2%
54%
% of participants reporting D&O Inquiries
% reporting coverage changes
Largest entities are more likely to respond to inquiries
from board members with changes to coverage
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Average number of
board members by asset size
Asset Size
Average Number of Board Members
Over $10B
11.9
$5 to $10B
10.9
$2 to 5B
10.5
$1 to $2B
9.9
9.2
$400M to $1B
$100 to $400M
8
$50 to $100M
8.2
$10 to $50M
7.1
$6 to $10M
$0 to $6M
7
5.9
The average number of board members reported by 2005
survey participants is significantly correlated with entity size
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Average number of
board members by ownership
Ownership Type
Average Number of Board Members
Public
Private
8
6
Nonprofit
11
The average number of board members reported by 2005
survey participants is highest for nonprofit entities
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Insurance Carriers
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Historical insurer carrier capacity
Survey Year
1995
1996
895
1,155
1,350
1997
1998
1,500
1999
1,550
2000
1,575
2001
1,550
2002
1,500
2003
1,350
2004
1,500
2005
1,500
Full Limits Capacity (in millions) – U.S. For-Profit Only
Capacity leveled off in 2005 at $1.5B
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Top primary market carriers — U.S.
% of 2005
Survey
Policy
Count
Insurer
% of 2005
Survey
Premium
Volume
Rank
Rank
Chubb Ins. Group
21.2%
1
AIG
36.3%
1
AIG
14.8%
2
Chubb Ins. Group
16.3%
2
Admiral
10.0%
3
XL Ins. Co.
7.2%
3
ACE
10.0%
4
Aegis
7.0%
4
Illinois Union/E-Risk
7.0%
5
Admiral
6.1%
5
Insurer
AIG and Chubb continue to dominate the primary market, according to our
2005 survey. AIG leading in premium volume and Chubb in policy count
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Top excess market carriers — U.S.
% of 2005
Survey
Policy
Count
Insurer
% of 2005
Survey
Premium
Volume
Rank
Rank
Chubb Ins. Group
11.1%
1
XL Ins. Co.
11.4%
1
XL Ins. Co.
11.0%
2
Chubb Ins. Group
10.7%
2
Old Republic
8.6%
3
AIG
8.4%
3
Hartford
7.1%
4
Hartford
7.3%
4
AIG
7.0%
5
Old Republic
6.9%
5
Insurer
Chubb and XL lead the excess market, although
the excess market is much less concentrated
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What’s Ahead for the D&O Marketplace?
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Where is the marketplace headed?
 Continued upward pressure on loss frequency and
severity
 Reserve strengthening still a factor on prior years
 Continued rate decreases, but smaller magnitude
 Pockets of rate increases
 Declining capacity
 Improving coverage terms
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44