Symposium Reports Stricter Underwriting, More Discipline Needed if D&O Market is to Recover

Insurers must become more disciplined, underwrite more strictly, better educate their insureds and get pricing right if they expect the Directors and Officers liability market to improve, the 2004 PLUS (www.plusweb.org) D&O Liability & Insurance Issues Symposium was told recently.

“Current rates are not adequately priced and there are environmental and economic reasons that are still out there,” said Robert Cox, senior vice president, Chubb Specialty. “It is an industry that still hasn’t learned its lessons. It is an industry that still needs rate changes.”

In today’s current legal environment, the mutual-fund scandal could be depicted as the greatest scandal in Wall Street history, according to Michael Cavallaro, RPLU, managing director, ARC Excess & Surplus LLC. “While the mutual-fund scandal is making it harder for asset-management companies to insure directors and officers, many mutual-fund clients don’t think it’s going to affect the way they are priced or underwritten, but they are mistaken,” Cavallaro explained.

Greg Flood, chief operating officer, National Union Fire Insurance Company, said that the results worsened beyond anyone’s expectations. Referencing the mutual-fund scandal, he noted that most industries don’t have a three-year tail. “It’s a luxury most industries don’t have,” he said. “You’re not honest with yourself if you think the market is doing well when you have three years to correct the problems.”

Jeffrey Lapmann, managing director, Marsh Inc. FINPRO, New York, who moderated the panel, asked whether D&O will be sold differently a year or two from now. Cavallaro said that what has happened in the market has changed the dynamics of how the product is sold. “There will be more voice to the outside director, more marketing to them. Brokers will be asked more and more to come to the board meeting,” he said. “Outside directors who want to serve on a board will bring in their own attorneys.”

Anthony Giacco, senior vice president, Executive Liability Underwriters, noted that the industry has gotten smart over the last few years and is asking the relevant questions. “If things keep going the way they are, rather than a new product or approach, things should be done more easily.”

Todd Jones, executive vice president, Willis of Pennsylvania, Radnor, Pa., said that a lot of time needs to be spent on educating clients on legislative issues. “Make sure you don’t get blind-sided,” he said. “There may be as much uncertainty today as years ago.”

“When you have a deal that’s not structured it can lead to exposure problems,” said John Rafferty, vice president and national D&O manager, Hartford Financial. “We’re in an environment right now that’s disingenuous. We have to be right more than wrong. The buyers are not excluded from this.”

He noted that it’s “always the other guy undercutting. The discipline is so elusive. We got our prices wrong in 1998-99. What had originally been a short-term expectation was much worse than that,” he said. We need to look at our business and think about what we’re doing. Who’s being overly optimistic and who’s being conservative. Those who are conservative will be here for the long run.”

Asked whether there were enough tools to help the market, Cox noted that while there are plenty of tools, it was more of a matter of how useful they are and to what degree brokers deduce the right outcome. “No matter what tools we have, it’s a snapshot of time. We’re dealing with periods of uncertainty going forward. It’s not the quality of the tools, but the quality of the analysis.”

What other real concerns are there for the D&O line? According to Giacco, every quarter it’s something different. “Sales practices, the ability to insure, long-term viability, it’s something different every day.”

Cox noted that since the mutual-fund scandal there is a lot of uncertainty as to what’s going to happen in the market. “It is difficult to predict and understand where the industry is going. I don’t know if there are any tools that would help. If so, they fall short of what is needed,” he said. “You’ll still have illegal acts and prospectus violations. These problems aren’t going to go away, they have to be managed. If we don’t bring up the rates, we’re going to see the same problems as in the past.”

Rafferty said that clients are displeased. “They say, ‘We’re not Enron, we’re not a mutual fund; we should be treated differently.’ Yet it seems weekly there’s a formal SEC investigation. We need to do a better job of educating our clients, explaining the bigger picture.”

Looking at the issue of price, Lapman asked where is the industry going to be? How much is enough? Are customers more interested in coverage or price? Cavallaro noted that some companies are completely focused on coverage and are willing to spend the money. “Other clients are more price-driven. We have to dictate what they want. We can educate them and the factors that affect them.”

Where are things going in the D&O market next year? According to Rafferty, brokers are underestimating the state attorneys general, the SEC and whistle blowers. “2003 was an okay year, but one year means nothing. The loss costs in this business are going to be tremendous.”

“Cases aren’t going to get any cheaper,” added Flood. “All the indexes are going back to historical highs. There’s plenty of work ahead for us on these claims. The problems are not going to go away.”

Cox noted that it is also a global issue. “There is a tremendous amount of uncertainty of what the future holds,” he said. “There is a huge claims inventory, the SEC is doubling its enforcement staff, which suggests more problems. We’re seeing all the fiduciary liability claims and there is a general increase in frequency and severity as a consequence of Sarbanes Oxley. There are companies that come in with no legacy issues, but if they don’t anticipate the problems, it’s incredibly short-sighted.”