The consulting firm Tillinghast-Towers Perrin anticipates a lessening of lawsuits against directors and officers of public corporations. Yet rigorous risk selection should remain a priority.
Stock market vitality can greatly impact the size of claims filed in directors and officers (D&O) liability insurance. According to analyst Mark Larsen with Tillinghast – Towers Perrin, the whirlwind of class action suits fuelled by the plunge of the major stock markets should dissipate, as the stocks put the brakes on their slide. At press time, the consulting firm was putting the finishing touches on a report on the status of the D&O market in 2002.
“In the D&O market, claims mirror the stock market: the lower the stock market, the harder to have those very large claims that we have seen in the last,” Mr. Larsen pointed out.
2002 saw premiums increase at least as much as in 2001, maybe more, he hinted. The report published in 2001 confirmed an average rise in D&O premiums of nearly 29%.
Despite the signs of a lawsuit downturn, tight risk selection will remain crucial throughout the year. All the more because many Canadian companies carry out operations south of the border, where lawsuits abound, often involving astronomical price tags.
Today, insurers are averse to some sectors. “Stocks listed on NASDAQ are particularly scary,” noted Jacques Brouillette, President and CEO of broker Global Expert.
“In general, high-tech companies are not sufficiently financed,” said Christopher Campbell, Regional Vice-President, Corporate Risk Services at La Garantie. They had been poorly assessed by insurers.”
Saddled by enormous financial difficulties, airlines are also being buffeted by market pressure. “Even the famous blue chips were not spared,” said François Viau, Assistant Vice-President, D&O at Dale-Parizeau LM.
Among other precautions, insurers now insist on meeting with the big boss of a company before writing a liability insurance policy for the officers and board members.
Bernard Dupré, National Director, liability Insurance at AIG, explained that insurers used to be less meticulous and asked fewer questions. “Now we are scrutinizing elements that do not even appear in the financial statements.”
Quasi-automatic contract renewals are a thing of the past. The qualification process now starts over with each renewal.
What’s more, insured today must contend with rising deductibles and shrinking coverage. Sometimes brokers must flesh out the coverage for the customer “by turning to two, three or up to four insurers,” Mr. Brouillette said.
Insurance policies with a two or three year term have also gone by the wayside. Policies now have a lifespan of less than…one year. “When a company foresees a short-term injection of capital, insurers sometimes choose to renew the policy for three months, pending the investment,” Mr. Brouillette explained.
Exclusions in contracts are mushrooming. Apart from unjust dismissal, coverage in case of a lawsuit filed by one administrator against another is now more difficult to obtain, Mr. Viau said. He added that in the past “it was possible to negotiate coverage against lawsuits by a majority shareholder not represented on the board of directors. Now, not a chance.”
One clause in particular grates on Mr. Viau: an exclusion for voluntary lawbreaking. “In routine business decisions, laws are broken every day. Through this exclusion, companies give themselves carte blanche to reject claims.”
Catchall policies are also on the endangered list. In a soft market, insurers had been offering policies that covered both companies and the individuals that administer them. The trend now is to return to the main goal of the policy: protection of directors and officers.
“Insured since the early 1990s, companies had been named in lawsuits on a par with directors and officers,” Mr. Dupré explained.
“Today, companies need to obtain coverage through an additional insurance policy,” Mr. Campbell added.
In addition, insurers now steer well clear of issuing riders that cover lawsuits by employees, for sexual harassment or racial discrimination for example.
Insurers’ capacity to write risks is also weakened, notably by a lack of capital due to the slumping value of their investments. Most insurers are directly affected by this situation. To replace the lost capital they are hiking rates. It is not uncommon for a company to have to disburse 150% and even 200% more to obtain coverage at renewal, some sources reported.
At AIG, Mr. Dupré indicated that premiums of Canadian corporations have risen 25% to 60%. Local companies listed on U.S. stock exchanges have had to swallow hikes of over 100%.
Mr. Viau noted an increase of about 15% to 25% during renewals in the business sectors Parizeau serves. “The increases are smaller for non-profit organizations.”
Premiums billed to companies listed on NASDAQ have rocketed by up to 150%, said Mr. Brouillette, especially since the burst of the Internet bubble. “Premiums are rising across the board, even for companies whose files have improved,” he added.
Still, Canadian companies’ premiums are about one third as high of those sent to U.S. companies, Mr. Campbell explained. “But the gap is shrinking bit-by-bit.”