Shane Crocker and Colin Smith* background the negative trend for Damp;O insurance and provide some strategies for directors insuring for the first time or renewing existing policies.
In the aftermath of September 11, it comes as no surprise that insurance premiums have increased. Directors and officers liability insurance had already become more expensive and September 11 exacerbated this situation, with the move to higher premiums and less favourable cover expected to continue. The market for D&O insurance in Australia has experienced a significant reduction in capacity over the last three years:
* HIH Casualty & General Insurance Ltd went into liquidation;
* GIO/AMP recently decided not to underwrite this class of insurance and;
* St Paul International has withdrawn from the Australian Market.
World events in 2001, including the terrorist attacks in the USA and a number of natural disasters, have seriously tested worldwide insurance capacity. A reduction in insurance capacity will almost certainly lead to a reduction in competition. This leads to a "sellers market" where insurers have the upper hand.
Worsening claims trend
Claims arising from the collapse of Enron in the USA are expected to result in major losses for global insurers. American insurer CNA recently reported a $US1.6 billion net loss for 2001, including: $304 million in after tax losses from the destruction of the World Trade Centre; $165 million in after tax charges related to restructuring; $52 million in after tax Enron-related losses, net of anticipated reinsurance recoveries; and $69 million in after tax reserve strengthening in CNA's London-based commercial and marine operations. CNA is not the only insurer suffering from a collective of major losses. Claims arising from the local collapses of HIH Insurance, One.Tel and Ansett are also expected to result in significant litigation and losses for Insurers.
The London insurance market has long been a haven for D&O insurance for Australian companies, but London underwriters have expressed their concern over a recent court judgment. A legal decision in Australia in 2001 (FAI vs Australian Hospital Care) has cast doubt, from an insurer perspective, over validity of "claims made" insurance in Australia.
D&O insurance is based on the "claims made" form of cover. Overseas insurers, including Lloyds of London, are currently taking a cautious approach to Australian D&O risks.
D&O insurers have, until recently, regularly expanded the scope of cover provided by their policies. With this increase in coverage, insurers have experienced an increase in claims. We anticipate insurers will take the opportunity to reduce coverage in these less competitive times. This will allow them to address unsatisfactory underwriting losses which will not be tolerated by their shareholders. This situation has been magnified by the losses arising from the September 11 terrorist attacks. There has yet to be specific moves for wholesale reduction in the scope of cover provided by D&O Insurance. However, there is speculation that this will happen in the near future.
Costs to rise further
We expect the cost of D&O insurance to soar, with increases of 20-100 percent already being experienced. A recent survey by JP Morgan and Deloitte Touche Tohmatsu/Trowbridge Consulting indicated that following September 11, average increases in D&O insurance premiums of 19 percent had occurred to December 2001. According to the survey, further increases of 21 percent are expected for June 2002 renewals.
Additionally insurers are being more selective. Some insured parties are finding they can no longer get the cover they previously enjoyed. In the worst cases, they may find they cannot obtain cover. We expect excesses will increase for the company reimbursement section of the traditional D&O contract. Indications are that these market conditions will prevail for some time and possibly years.
Here are some key points which may help achieve the best possible outcome for your policy:
1. Do not wait until your insurance expires to find out what your options are. Begin the process no later than three months prior to expiry. This way you will avoid last minute surprises.
2. Make a concerted effort to nurture continuity of the relationship with your D&O insurer. This will be most effective with larger corporations. However smaller organisations should make every effort to improve their options.
3. Ensure that the information provided to your insurer is current. The current annual report and financial statements should be available. If your policy is due outside your reporting date, provide interim financial statements and information that may place your company in a better position from the insurer's perspective.
4. Brief your insurer, or provide formal documentation as evidence of your commitment to sound corporate governance principles and to the diligent discharge of directors' and officers' duties. If you do not employ these procedures, insurers may take a penal approach to your premium and cover or, worse still, decline to insure you.
5. Keep your insurer informed of company activities and plans. Providing a business plan to support your renewal proposal form and annual report will help your insurer understand your business.
Where continuity with your insurer is not possible the information in 3, 4 and 5 above will assist you to quickly investigate alternative markets. Regardless of these initiatives, there is no guarantee that you will be able to obtain insurance. Be prepared Discuss your situation with your advisers and ensure that you have fallbacks in the event of an adverse renewal quotation from your existing Insurer. Investigate alternatives that will provide some of the protection, such as personal D&O liability insurance and stand-alone employment practices liability insurance.
These challenging insurance market conditions are likely to prevail for some time, so timely planning and preparation of beneficial underwriting information is paramount.
* Shane Crocker is senior insurance and risk consultant and Colin Smith is principal consultant with Strategic Insurance & Risk Solutions, an independent insurance and risk consulting firm. The latest guide on D&O insurance, "A Guide to Directors and Officers Liability Insurance" is now available through AICD publications.
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