Canadian Underwriter
Feature

D&O coverage rates hopelessly inadequate


November 1, 2000   by Canadian Underwriter


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Given the rise in litigation and claims severity under D&O (directors and officers) coverage, rates are woefully inadequate, a recent Toronto Insurance Conference seminar was told. Udo Nixdorf, senior vice president of Chubb Insurance Company of Canada, says trends in litigation which are holding individual directors increasingly liable for business practices are among the factors contributing to rate inadequacy in D&O coverage. Studies have suggested this inadequacy may be as much as 45%.

“We need to stop the rate erosion… to stave off a hysterical response further down the line,” notes Nixdorf. Rate inadequacy during the development of D&O coverage in the 1980s led to swift rate increases that forced many insurers out of the market, and others to impose strict coverage restrictions to reduce claims. A knee-jerk inflation of rates in the future could spell disaster for insurers, as opposed to a steady increase over time. This is particularly true given the shrinking number of policies being sold as a result of mergers and acquisitions reducing the number of companies to do business with. “The basket is getting smaller,” he notes, and consolidation makes the underwriting department’s job more difficult, in attempting to “evaluate the future” of new mega-companies.

One of the growing markets for D&O coverage is the high-tech industry. Not only are new companies entering the market, but existing companies are creating new liabilities through the use of the Internet both as a sales tool and internal communication tool. “The new companies are high-tech, or they’re using it, or they’re related to it…and they’re more likely to be sued,” says Nixdorf. Diane Morrison of Marsh Canada agrees that the high-tech market is the emerging field for D&O coverage. “The vast majority of volume we’re seeing is high-tech.”

Morrison adds that the movement of these high-tech companies into public entities is an increasing opportunity and challenge for insurers. D&O coverage is a necessity in this step, she says, to attract capital and to deal with the liabilities associated with mass hiring and advertising. And these companies “want a broker who knows the market”, she adds, stressing the need for brokers to understand the specific needs of high-tech companies and the intricacies of initial public offerings (IPOs). “The premiums are there with IPO because of the risks involved.” Among these risks are disclosure issues, financial reporting and employment related claims, as well as insider trading. And at least one U.S. survey suggests the more than 10% of the companies that went public as recently as three years ago have been sued in shareholder class actions, she notes.


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