Statistical Trends in the D&O Marketplace 2004 PLUS D&O Symposium

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

Session Outline• Introduction• Class Action Trends Segway• Premium Trends• Trends in Retention of Risk• Coverage Issues• Underwriter Focus• Capacity

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!

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!

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

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


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

Frequency Trends – “Adjusted”

Federal SEC Class Action Litigation(Source: Stanford Law School website)

050

100150200250300

Year

No

. o

f S

uit

s

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

The Undiscovered Country

• Hundreds of open claims may be typical, but

• 45

• Claims alleging damages in excess of $1 billion!


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

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

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

Premium Trends

• 33% @ 42% => 80%

• 135,115,50,25 => 80%

• 3 Years Worth => 5.2X

Typical D&O Percentage Increases

0

50

100

150

200

250

Overall MarketTech D&O Mkt

Publicly Traded Companies

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



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



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


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.


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.


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


Another View of Changes in Retentions


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.


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.


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

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

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

“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”


The Market Is Not Differentiating Among Risks

Polices rated byinsurer pricing schedule

Actual marketpricing of same policies



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


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

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

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


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)

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

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

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

“Please Lord, give me another hard market. I promise not to blow it this time.”

Sign on underwriter’s desk, circa 1989

Statistical Trends in the D&O Marketplace 2004 PLUS D&O Symposium

Documents

inadequatebut market

statistical trends

severitydo claim costs

frequency of claims

average securities claim

mega claim settlements

increased severity of

millionwaste management