D&O UPDATE
We hope most of you have experienced what we have seen recently and that is an increased flexibility on the part of Directors & Officers Liability insurers in pricing and policy terms. Depending on the circumstances of each insured, we have seen premium reductions on renewal of anywhere from 5% to 10% and a greater willingness to improve coverage at the same time.
What's behind this trend? It appears that there are a number of factors at work. For one thing, a recent study done by NERA Economic Consulting (a subsidiary of Marsh & McLennan Company) noted a significant decline in shareholder class action filings in Federal court in 2006, a trend first noted at the end of 2005. There were 135 filings in 2006, a 36% drop from 2005 and the lowest since 1996, a year after passage of the Private Securities Litigation Reform Act that sent many plaintiffs into state courts. A similar trend was noted by Stanford Law School's Securities Class Action Clearinghouse. This was in spite of a surge in the number of suits involving allegations of the backdating of options.
Another seemingly contradictory finding of the same study was that the size of settlement in such litigation was continuing to rise. The average settlement in 2006 was 36% higher than 2005, even excluding some of the "mega-settlements" over $1 billion. What you need to keep in mind, however, when looking at these numbers is that median settlement time lag is about 2½ years, so a large number of the cases settled in 2006 have been around for quite a while.
There is considerable speculation as to what may be causing this trend and the reasons range from Sarbannes-Oxley to Eliot Spitzer. Sarbannes-Oxley has been around for nearly five years and some say that this is long enough to have significantly improved corporate governance. In addition, criminal and regulatory enforcement on both the state and federal level may have caused those who were predisposed to improper activity to think twice before going ahead. SEC requirements that offenders pay out of their own pockets and not rely on corporate insurance have no doubt added to this mindset.
Others have observed that the stock market has changed since the 1990s. The number of companies listed on the major stock exchanges has declined over the past decade and there are fewer risky IPOs than there were during the tech boom times of the '90s.
Whatever the causes, now is the time to put renewal pressure on D&O insurers to lower their premiums and improve coverage. If you haven't marketed this coverage in a few years, you may want to consider doing so, with an eye toward maintaining your continuity and retroactive dates (if any).
-- Christopher B. Ashton, CEBS
Vol. XX, No. 3
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"Consumer loyalty, in insurance and elsewhere, is an oxymoron." "(Q)uality client service isn't important to every . . . prospect or insured." "(A)gents must evaluate which of their accounts deserve attentive local service and which warrant something less." These are the words of Alan Shulman, CPCU, a provider of sales and marketing ideas for property/casualty professionals, in a column in the May 21, 2007 issue of the Insurance Journal. Mr. Shulman goes on to say, "All insureds are not equal. Don't waste scarce resources on those who value only the bottom line." In other words, if clients are not complaining about the low level of service on their accounts, feel fee to reduce service even further. What's the worst they can do? Take their business elsewhere? We have long decried the lack of service in what is essentially a service industry, and it is enlightening to see that some sales guru is actually advising agents and brokers to cut back even further. It all goes back to the "squeaky wheel" theory: if you want better service, unfortunately you have to complain loud and long. Either that or try to find a different agent or broker willing to provide the service you need. Mr. Shulman also makes the point, "Reducing services to some insureds is just the beginning, but an important first step." This doesn't bode well for those of us dealing with agents and brokers who follow Mr. Shulman's advice. --- Ed.
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