D&O premiums decline: Tillinghast

For the first time in the last five years, directors’ and officers’ premiums dropped in 2004, according to a new study by Tillinghast. The 2004 D&O Liability Survey finds rates declined an average 10%, the first decline since 1999 for the troubled line. However, Canadian respondents widely reported D&O premiums rising, with 90% say they have seen increases over the past five years.Competition has taken hold in the segment, on the back of an 11% rise in capacity this year this is particularly true in excess layers for large public companies, where rates fell 10-15%, the study notes. Areas which have not seen such declines include banking, durable goods, health services, real estate and construction. However, Tillinghast does not expect this buyers’ market to last. “This soft market for D&O insurance will be shorter and less pronounced due to lower investment returns than in the 1980s when cash flow underwriting was prevalent,” says Jim Swanke, managing principal for Tillinghast’s strategic risk financing practice. “Carriers will likely need to begin increasing rates in the short to medium term in order to maintain their return on equity.” The survey indicated wide availability of coverage, and for those companies going without coverage, cost was only cited by 26% as the main factor. But D&O claims costs continue to rise in 2004, claim frequency was up by 11% and claims susceptibility up 6%. Severity was also up in many classes of business. As well, more than half of the claims cited by participants are still open. At the same time, coverage is broadening, with fewer respondents taking higher deductibles, and average policy limits increasing in most classes.Tillinghast predicts the hard market will return in D&O by 2006, as pressure on claims continues to increase. “We expect to see a leveling of capacity moving forward, continued pockets of rate increases and a smaller magnitude of rate decreases as the market digests this ‘too much, too soon’ softening,” says consultant and survey leader Elissa Sirovatka.