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Bernard Ebbers, Dennis Kozlowski, John Rigas--if these big dogs can tumble from corporate power to ignominy, then any director or officer can. This realization seems to be on many company leaders' minds, according to the D&O Liability 2005 Survey on Claims and Insurance Purchasing Trends from Tillinghast.

The consulting business of Towers Perrin released its 28th annual report on the D&O market this winter, and for the first time, the survey measured the level of interest of board members in the coverage.

In some instances, according to Tillinghast's findings, companies actually stepped up their liability coverage in response to these inquiries. Out of the public-company participants, 19 percent said that they've altered their D&O coverage. Only 5 percent of private and 2 percent of nonprofit companies answered here in the affirmative.

"We would anticipate that they probably did something like change the retention or the limit, or add more side A coverage, or had a discussion about the separability clause, something like that," said Elissa Sirovatka, the D&O study leader at Tillinghast.

As for the fact that only a minority of companies acted upon their directors' inquiries, Sirovatka suggests that many companies didn't change because of satisfaction with their existing coverage. "I think that would indicate that those companies have been doing a good job in kind of anticipating what their D&O needs were," she said.

Another major highlight of the study was that D&O buyers got more for their money. Premiums decreased on average for the second year in a row. Between 2004 and 2005, D&O costs dropped on average 9 percent for for-profit corporations, after a 10 percent drop the year before. Exclusions for the most part were loosened, while limits increased or didn't budge. For U.S. for-profit participants, average policy limits increased to $14.3 million in 2005 from $13.6 million in 2004. Participants also experienced the same trends for excess coverage.

All the while, however, severity and frequency of claims increased, a trend made more apparent by Tillinghast's analysis of repeat responders. Respondents who participated in the last three surveys saw their susceptibility jump 6 percentage points in 2005 from the previous year. Frequency also jumped to a level where every other respondent faced a claim in the last year. Overall, the average claim payment for all respondents increased in 2005.

If the current market seems counterintuitive, it is. "As an actuary," said Sirovatka, "it's not where I would expect to see things going. And so I keep thinking, 'OK, next year, it's going to switch.'"

The explanation for the current softening, according to Sirovatka, was that some of the big insurers in the market were treading water at the moment, trying to maintain their market share.

"I think what otherwise might have been kind of a plateauing and leveling off of the market continued to stay soft," she said, "because those companies and those players were saying, 'You know what, let's just keep our market share and keep our presence.'"

Sirovatka's advice in this market was to take advantage of it while you can. "The coverage really is still quite broad, you know, quite generous, as far as we can tell relative to the prices that they're charging. So, take advantage while you can, be careful of who you buy it from and watch because we see a changing ahead."

This year's D&O survey included responses from 2,645 U.S. and 49 Canadian firms. It was conducted during the second and third quarters of 2005.

April 1, 2006

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