statistical trends in the d&o marketplace 2004 plus d&o symposium
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Statistical Trends in the D&O Marketplace 2004 PLUS D&O Symposium. Moderator:Phil Norton, President – Gallagher Panelists:Dave Bradford, EVP – Advisen Elissa Sirovatka, Consulting Actuary – Tillinghast Vincent Caracciolo, VP – Liberty John Kuhn, EVP – Axis - PowerPoint PPT PresentationTRANSCRIPT
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Statistical Trends in the D&O Marketplace
2004 PLUS D&O Symposium
Moderator: Phil Norton, President – Gallagher
Panelists: Dave Bradford, EVP – Advisen
Elissa Sirovatka, Consulting Actuary – Tillinghast
Vincent Caracciolo, VP – Liberty
John Kuhn, EVP – Axis
Keith Thomas, SVP – Zurich
Wednesday, February 11, 2004
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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The Post-PSLRA Dynamic• The cost of “doing business” is suddenly up 40%• Entity coverage works but some clients become less
interested in their litigation• The backlog of cases mount• Significant losses become a reality• Carrier reserves were inadequate
– But market holds onto excess capacity as competing carriers are slow to recognize losses and increase reserves (and prices!)
• Loss ratios fall out of the money – far out!
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The “Not So Perfect” D&O Storm• D&O insurers continue to be concerned about their reserves for D&O losses;
key drivers for the hard market have been:
Increased Severity of Claims- including Mega claim settlements
Increased Frequency of Claims- legal costs rising dramatically
Reinsurance Market Issues - effectively decreasing market capacityFinancial Scandals
- adding fuel to the fire!
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2003 Tillinghast D&O Survey
• 2,068 U.S. companies responding (and 71 Canadian)• 15 business classes, with largest representation from
technology, biotechnology & pharmaceuticals• About 14% of the U.S. participants have over $1
billion in assets, and about 42% are publicly traded• Measuring D&O trends since 1973
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2003 Tillinghast D&O Survey Results
Signs of Continuing Hard Market Conditions
• Premiums increased significantly• Policy limits stable for most, but small decrease
on average• Deductibles/retentions level or increasing• Enhancements taken away• Exclusions still an issue• Capacity declined
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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D&O Class Actions• Frequency – Reasonably Level
– 212 in 2003– “Adjusted” prior 5-year average of 211
• Severity– D&O Claim Costs have tripled since 1997, with
sources such as Cornerstone Research estimating average securities claim costs in the range of $25 million.
– “Mega-claims” are the new reality
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Frequency Trends – “Adjusted”
Federal SEC Class Action Litigation(Source: Stanford Law School website)
050
100150200250300
Year
No
. o
f S
uit
s
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Recent Large D&O Claim Settlements*• Cendant Corp. $2.83 Billion• WorldCom $750 Million• Lucent Technologies $631 Million• Bank of America $490 Million• Waste Management 2 $457 Million• Oxford Health Plans $300 Million• Daimler Chrysler $300 Million• 3com $259 Million• Computer Associates 1 $230 Million• Waste Management 1 $220 Million• Rite Aid $200 Million• Digex $165 Million• Dollar General $162 Million
• American Continental $157 Million• Dayton Power & Light $146 Million• Rexene $145 Million• Informix $142 Million• Computer Associates 2 $135 Million• Sunbeam $125 Million• Mattel $122 Million• Conseco $120 Million• Philip Morris $116 Million• IKON Office Solutions $111 Million• Prison Realty Trust $104 Million• MicroStrategy $103 Million
*Estimates may be subject to change
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The Undiscovered Country
• Hundreds of open claims may be typical, but
• 45
• Claims alleging damages in excess of $1 billion!
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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Defying GravityCost of Risk Compared with Insurer Results 1990-2003
6.4
4.83
6.46
8.918.3
7.7 7.3
6.49
5.7 5.25.71
5.25
6.1
11.96101.5%
90.6%
101.1%
94.4%
91.3%
89.3%
84.5%
90.7%
94.2%
96.0%
95.9%
91.3%
90.0%
3
4
5
6
7
8
9
10
11
12
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Year
Co
st o
f R
isk
84.0%
86.0%
88.0%
90.0%
92.0%
94.0%
96.0%
98.0%
100.0%
102.0%
Ove
rall
Op
erat
ing
Rat
io
Source: A.M. Best, Advisen/RIMS Benchmark Survey Database
InsurerOperatingRatio
Cost ofRisk
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Average Annual Tillinghast D&O Premium Index Increased 33%
Median is increasing less than average implying that some organizations were hit with much greater premium increases.
-20%
-10%
0%
10%
20%
30%
40%
50%
1995 1996 1997 1998 1999 2000 2001 2002 2003
Median
Average
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Premiums were up for all classes, including private company and not-for-profit sectors
U.S.U.S. CanadaCanada
70%
20%
10%
89%
7%
4%
Increased
Decreased
Same
Changes in Premium from Prior Year
Majority of participants reported increases in premium during the second half of 2002 and first half of 2003
Source: Tillinghast 2003 D&O Survey
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Premium Trends
• 33% @ 42% => 80%
• 135,115,50,25 => 80%
• 3 Years Worth => 5.2X
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Typical D&O Percentage Increases
0
50
100
150
200
250
Overall MarketTech D&O Mkt
Publicly Traded Companies
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Directors & Officers LiabilityPercentage Change in Average Premium at Renewal
0.0%20.0%40.0%60.0%80.0%
100.0%120.0%140.0%160.0%180.0%200.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from 2000 2002 from 2001 2003 from 2002
Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
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Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
Management Liability Premium Change at Renewal
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
22
00
1 f
rom
20
00
q1
20
01
fro
m 2
00
0
q3
20
02
fro
m 2
00
1
q1
20
02
fro
m 2
00
1
q3
20
03
fro
m 2
00
2
q1
20
03
fro
m 2
00
2
q3
Directors & Off icers Liability
Fiduciary Liability
EPLI
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Source: Advisen/RIMS Benchmark Survey Database
A Market on the Verge of Change
Percentage Change in Premium at Renewal
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from2000
2002 from2001
2003 from2002
Directors & OfficersLiability
Property - Domestic
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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Risk Transfer was Stable
QuarterQuarter IncreasedIncreased
Third Quarter 2002
Fourth Quarter 2002
First Quarter 2003
Second Quarter 2003
Third Quarter 2003
Total
16%
12%
13%
12%
13%
13%
Changes in Limits by Quarter— U.S.
DecreasedDecreased
16%
20%
13%
12%
13%
14%
SameSame
69%
68%
74%
76%
74%
73%
For the most part, insureds maintained their policy limits.
Source: Tillinghast 2003 D&O Survey
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Retentions Continued to Rise
QuarterQuarter IncreasedIncreased
Third Quarter 2002
Fourth Quarter 2002
First Quarter 2003
Second Quarter 2003
Third Quarter 2003
Total
55%
58%
45%
38%
27%
44%
Changes in Retentions by Quarter — U.S.
DecreasedDecreased
20%
11%
15%
11%
11%
13%
SameSame
25%
30%
40%
51%
61%
43%
But fewer and fewer insureds are reporting increases in deductibles/retentions since the 4th quarter of 2002.
Source: Tillinghast 2003 D&O Survey
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Directors & Officers LiabilityPercentage Change in Average Retention at Renewal
0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4
2001 from 2000 2002 from 2001 2003 from 2002
Source: Advisen/RIMS Benchmark Survey Database
Another View of Changes in Retentions
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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Enhancements Difficult to Maintain
12%
17%
12%
1%
5%
8%
18%
22%
37%
53%
0% 20% 40% 60% 80% 100%
2003
2002
2001
2000
1999
1998
Changes in Enhancements by Survey Year
Decrease
Increase
0
0
Continued evidence of coverage roll backs, but not as bad as previous year.
Source: Tillinghast 2003 D&O Survey
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Exclusions Still an Issue
2%
3%
3%
25%
17%
21%
1%
1%
1%
1%
0% 20% 40% 60% 80% 100%
2003
2002
2001
2000
1999
1998
Changes in Exclusions by Survey Year
7%
14%
Decrease
Increase
Nearly one in five insureds saw the imposition of additional exclusions.
Source: Tillinghast 2003 D&O Survey
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The Hard Market Good News• Coverage “take-aways” were not as severe as in the
previous hard market• Major issues revolve around:
– Entity Coverage versus Pre-determined Allocation– Discovery Clause restrictions– War, Terrorism or even Mold exclusions– Deletion of retention waivers– Lower automatic subsidiary coverage thresholds– Severability
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Overall D&O Coverage Trends
0.75
1
1.25
1.5
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
N-B Coverage Index
Norton-Bastian D&O Coverage Index
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Risk Financing Alternatives
• Large Deductible Programs• A-side Only• Blending A-side only and full coverage• Blending D&O with other lines of coverage• Group Captive formation• Finite Risk• Self Insurance — including Indemnification Trusts,
Single Parent Captive, and Financial Markets Vehicles
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“A-side” Alternatives to consider
• All Side-A Program– Very rare because they are not cost effective
• Side-A excess over full coverage– Vanilla products are ok (unless you asked for chocolate!)
• Side-A “excess & DIC” over full coverage– Delivers quality – but at a price
• Independent Directorship Liability– Often too much money to not insure “the buyer”
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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The Market Is Not Differentiating Among Risks
Polices rated byinsurer pricing schedule
Actual marketpricing of same policies
Source: Advisen/RIMS Benchmark Survey Database
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The Market Is Not Differentiating Among Risks
0 10 20 30 40 50 60 70 80 90 100
0.3
0.2
0.1
0.0
ISS Industry CGQ
Premium/Revenue
Source: ISS, Advisen/RIMS Benchmark Survey Database
Normalized Primary Premium/Revenue to ISS Industry CGQ
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The Market Is Not Differentiating Among Risks
Board Effectiveness Rating
Premium/Revenue
Source: Corporate Library, Advisen/RIMS Benchmark Survey Database
0.3
0.2
0.1
0.0 D C B A
Normalized Primary Premium/Revenue to Board Analyst Board Effectiveness Rating
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Well, Maybe a Little...
S&P Rating
Premium/Revenue
Source: Standard & Poor’s, Advisen/RIMS Benchmark Survey Database
B- B+ BB BBB- BBB+ A AA-
0.10
0.05
0.000
Normalized Primary Premium/Revenue to S&P Credit Rating
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Well, Maybe a Little...
Consumer DiscConsumer StapFinancialsHealth CareIndustrialsITMaterialsTelecomUtilities
0 100 200 300 400 500
Median Pure Premium ($000)
800
700
600
500
400
300
200
100
MedianPolicyPremium($000)
Source: ISS, Advisen/RIMS Benchmark Survey Database
Median Primary Policy Premium to Median SCAS Pure Premium
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Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity
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Capacity Declined in 2003 to the Lowest Level Since 1997
1,350
1,500
1,550
1,575
1,550
1,500
1,350
1,155
895
835
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Full Limits Capacity (in millions) — U.S., For-Profit Only (Source: Tillinghast)
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The Reinsurance Market
• Still Difficult:– Initially driven by the 9/11 tragedy– Renewals are newsworthy– Aggregation concerns - will it happen again?– Insurer vs. reinsurer loss ratios– More intrusion and restrictions; fewer exceptions– More net lines translates into:
– => more Caution with limits offered– => => an effective reduction in capacity– => => => less competition
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Calm in the Storm? - New Capacity
• Brokers maintaining 47 D&O carrier relationships, including several newer ones
• $300 million capacity is readily available for a difficult risk and much more for a better risk
• But carriers still very reluctant to use their full capacity on most risks
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Changes in Market Players
Traditional D&O underwriters losing share… …while new entrants grow in significance
D&O Market Share by YearNew Market Entrants
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
2000 2001 2002 2003
AWAC
Arch
Axis
D&O Market Share by YearTraditional Markets
0%
5%
10%
15%
20%
25%
30%
35%
2000 2001 2002 2003
Chubb
AIG
Hartford
Zurich
Travelers
Source: Advisen market data
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“Please Lord, give me another hard market. I promise not to blow it this time.”
Sign on underwriter’s desk, circa 1989