Aon's D&O Insight product grew out of a desire on the part of clients who sought to gain a more complete understanding of the Side A costs underlying their D&O risks. Historically, that's been a major challenge for insurers, especially when it came to blending an effective Side A program with standard Side B and Side C coverage.
Many approaches were developed to address shareholder class-action risks, but these methods did not specifically address Side A risks. Without contemplating the coverage of the policy, the true value of the insurance would be unknown.
Side A D&O insurance is intended to cover directors and officers when their company cannot indemnify them, in the case of a bankruptcy, for example, said Joseph Rizzo, a senior consultant and actuary at Aon Risk Solutions in Chicago. Rizzo was the main driver behind Aon's innovative D&O Insight product.
Side B coverage, he said, is coverage for claims against directors and officers where the company does indemnify them, and Side C coverage is coverage for the company itself.
"The D&O Insight product innovation takes a prospective approach to determine the risk of D&O claims," he said. "It goes beyond traditional approaches, which were retrospective reviews of past events, which endeavored to compare those events to the current company profile."
Rizzo added that "the difference between what we're doing and what's in the market elsewhere is, first, that we're covering all elements of D&O insurance -- Side A, Side B and Side C -- and secondly, that our analysis projects the stock price forward to figure out what the potential for loss in the next year is and, if there is an event, how much money directors and officers could lose."
"This product, which has been on the market for a year or so, covers everything that goes into that buying decision," he said, "including how much in limits they're buying as well as the price and value of the insurance."
D&O Insight uses market factors to project what the client's risks could look like in a future policy period and, from that analysis, projects the risks to all types of D&O losses that can emerge, he said.
"The financial markets inform the model, which provides information to generate potential losses," said Rizzo, who holds a B.A. in Mathematics from the University of Chicago.
The product's goal is to stay flexible and forward looking, "to leverage market measures such as stock volatility, liquidity issues, mergers and acquisitions complications, and regulatory matters when determining a client's risk," he said.
By modeling the potential risks that can occur in D&O litigation, D&O Insight examines insurance deductible limits, costs and the associated impact on an organization, Rizzo said. "The analysis calculates the value of the current insurance to the client.
"The same information can determine the benefit of alterations to the program," he said. "The analysis also gives valuable information to communicate to directors and officers about the level of protection the insurance provides by calculating the probability that the Side A limit would be exhausted."
Rizzo said he and his D&O Insight team deal primarily with risk managers, though their information may be taken up to the CFO, treasurer or even the CEO.
Working with Rizzo on developing D&O Insight were Stephanie Vogel in Aon's actuarial and analysis area and Eric Boyum in the company's Financial Services Group.
When it comes to marketing D&O Insight, Aon's Sara Hakim, based in Calgary, Alberta, works closely with Rizzo.
Hakim, vice president of the Financial Services Group for Aon Risk Solutions, said Rizzo was the architect of the product.
"The tool that Joe created has been marketed mainly as a governance tool for directors and officers," she said.
"What sets our tool apart is it allows a company to drill down to specific company stock performance to gauge a company's potential risk.
"What I've appreciated about Joe is that he is an actuary by training so he has applied that stringent methodology to constantly improving the D&O Insight product. His technical expertise is excellent."
--By Steve Yahn
September 15, 2013
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