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By JARED SHELLY, senior editor/online editor of Risk & Insurance®

NEW YORK - What a difference a few years makes. Before the economic downturn, underwriting directors' and officers' insurance was equivalent to "printing money," said Shelley Norman head of private nonprofit management liability for the U.S. and Canada at Chartis.

Now "the reality is that there are real claims in that segment and real money spent to fight those claims," she told the crowd of about 150 at the Management Liability Insights Conference on Sept. 20 in New York.

In fact, insurers are likely to have trouble finding even the slimmest of profit margins in the D&O segment.

Bruce Simmons, vice president at XL Group PLC in Hartford, Conn. said that it's pretty simple -- carriers can offer coverage as long as they're getting paid for it.

"There are slim margins on this business. We do have broad cover but we need to get paid for it -- or we have to start restricting coverage," he said. "We have to decide as an industry what we're going to do and what's going to be our next step."

One way forward is to make sure that it's not a "toss-in cover" said Simmons. Insurers "actually have to sit down and underwrite that risk."

"I don't know how much longer as an industry we can keep throwing away surplus," he said. "D&O has gone from after-thought to the loss leader in certain segments of the private space."

With Chartis and Chubb each holding roughly 17 percent of the D&O market, the two companies hold more than one-third of the market. XL is next with 6 percent, according to data provided by Dave Bradford, president of the Research & Editorial division at Advisen.

One way for insureds to save money is to shop around and change D&O carriers. "Companies that renewed carriers got a price increase," said Bradford. "Those that changed carriers got a price decrease."

"We see steady growth with rates increasing a little bit. Despite rates going up more policies are being sold to this segment of the marketplace. Rates will rise for a while driven by fairly poor loss experience," said Bradford. "There's going to be a lot of competition. Let's see if that competition will overwhelm rate rally at this point."

Lack of Education Hurts

Oftentimes, the people buying insurance policies are the ones that know the least about them -- and in the not-for-profit side, that can be devastating.

At a panel session later in the day, Chris Giovino, partner in charge of forensics at Dempsey Partners, told the audience about a recent $150,000 loss at a Jewish federation and two similar losses at Catholic organizations. In all three events, the organizations thought they had crime, fidelity and fee coverages in place to protect them. In actuality, they did not.

"Not-for-profits are the most ripe for fraud and deception," he said.

Plus when donors find out about fraudulent activity or what they perceive to be mismanagement, they may pull back funding. "You have to feel for these people when they have these losses," he said. "These are the most altruistic people."

"They need education," he said. "They don't find out that they don't have [coverage] until the worst possible thing happens."

A problem could be that brokers simply aren't incentivized to pay much attention to such coverages because there isn't much money to be made there.

But convincing clients that they can't prevent a fraud from happening is a hard sell -- but one worth shooting for, said Giovino.

IT to the C-Suite?

Risk managers would say that cybersecurity is a serious emerging risk and needs to be top of mind for any company. But Rick Bortnick, attorney at Cozen O'Connor, said that 31 percent of companies don't even know if they have a crisis-management plan for a network security breach.

The way to change that culture is very simple, "bring crisis management and IT into the C-suite," said Joe DePaul, senior vice president of management and professional liability at Arthur J. Gallagher & Co. "Too many of these people meet for the first time when an event happens."

With the average cost of a data breach around $5 million, Bortnick said that corporate boards need to look at privacy, cyber and security as top priorities -- right alongside profit margins.

"It's not a should. It's a must," he said, speaking during a session on cybersecurity.

But touting cybersecurity initiatives is no way to go either, said Kurtis Suhs, vice president at Ironshore Insurance Services. "As an underwriter, I hate when they say 'we have the best security in place,' " he said, because when there is a breach, that statement is proven false.

He also said that most companies aren't ready for a very basic question regarding security breaches. Who do you call first after an incident happens?

Suhs said his first call would be to a forensic investigator who can help get to the bottom of the fraud.

Bortnick and the other attorneys on the panel argued that a company should first call a lawyer because they can get lawyer-client privileges and the lawyer can act as a quarterback to get the process rolling.

September 25, 2012

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