By KATIE KUEHNER-HEBERT, a freelance writer based in San Diego with more than two decades of journalism experience with expertise in financial writing.
After nearly a decade of falling prices for directors' and officers' liability insurance, the market is showing signs of finally firming, according to Marsh Inc.'s Global Insurance Market Quarterly Briefing for the second quarter.
Marsh last week also introduced its new Marsh Risk Management Global Insurance Index within the briefing, which shows that overall, rates in the global insurance market also generally firmed during the quarter.
In particular, nearly half of small- to mid-sized companies, companies with market capitalization less than $300 million, had rate increases in the second quarter. Only a fifth of larger companies, those with market caps more than $10 billion, experienced rate increases, the quarterly briefing found.
The principle reason why rates on primary D&O policies are rising is because of the dramatic increase in M&A-related lawsuits by shareholders disputing either the deal terms or the lack of due diligence of the buyer to shop for more bidders, said Tripp Sheehan Marsh's D&O product leader in Boston. These types of lawsuits typically settle for under $5 million, which can be covered by limits obtainable under primary D&O policies.
"My impression is that plaintiff attorneys have found a way to generate revenues through the filing of these merger objection claims in state courts," Sheehan said. "The filing of these claims have really picked up, as plaintiff firms see them as low-hanging fruit."
However, the rates for primary layers appeared to be firming more than for excess layers, particularly for those organizations with less favorable risk profiles, according to Marsh's briefing. On average, rates for excess layers continued to decline modestly, mainly due to the oversaturation of carriers in the excess D&O market, Sheehan said. About 60 carriers write such policies, but of those, only about 20 write primary D&O policies.
"It's a classic case of excess supply over the demand for insurance, so you're seeing a softening in the pricing in the excess market," he said.
D&O policy rate data from Aon Risk Solutions is similar: the average primary layer D&O pricing rose 3.08 percent in the second quarter, for those clients that renewed both in the second quarter 2012 and a year earlier. Overall D&O pricing for all layers decreased by 1.1 percent in the second quarter for those clients, which means that excess rates are still competitive, and that primary and excess D&O rates are somewhat bifurcated, said Brian Wanat, national practice leader of Aon Risk Solutions' Financial Services Group.
On April 1, there was a "clear inflection point" in the direction of pricing from declining to ascending, due to a higher frequency of securities and M&A lawsuits, coupled with meager investment income and an increasingly challenging primary D&O environment, Wanat said.
However, Wanat believes this will not be "a true hard market" for D&O, which historically has double-digit or even triple-digit increases.
"Over the next year I think there will continue to be a slight firming of primary rates in the single-digit range, but there's still a large amount of excess and you're going to see a lot of competition between the carriers in the excess," Wanat said. "So whatever increases buyers get in the primary, they can make up for it in the excess."
Marsh's new index, which tracks the annual changes in rates for Marsh clients that renewed their insurance program during particular quarters, shows a "clear trend" of firming of the global insurance market since the third quarter of 2011. Overall, there was a 1.4 percent increase in rates at renewal for the second quarter of 2012, as compared to renewal rates in the second quarter of 2011, according to the composite index.
The composite was derived from the other three lines of the index that represent the global rate trends in casualty (general liability, motor/automotive, workers' compensation/employers liability), property, and financial and professional (directors' and officers', financial institutions, and professional liability). The composite is also weighted by the amount of premium placed in each.
Claude Yoder, head of Marsh Global Analytics in New York, said that the index was created principally for Marsh's multinational clients that have operations throughout the world.
"This is a way for them to get one quick number, to try to capture what may be going on within their portfolio," Yoder said. "In the absence of this, they would have to go to many different sources -- if they even exist -- to try to cobble together how the rate environment is impacting their overall premium spend."
Marsh's quarterly briefing also showed that carriers are more closely scrutinizing exposure to wildfire and emerging risks such as risk to computer networks and cloud computing. Companies can obtain coverage for losses suffered from the failure of their cloud provider, and carriers are offering a broadened business interruption trigger, in which a company could receive coverage for loss of income due to computer system outages -- whether or not the outage was caused by a security breach.
July 24, 2012
Copyright 2012© LRP Publications