D&O Rates Falling Despite Rising Costs

Rates in the directors' and officers' liability market fell again last year, prompting industry observers to accuse the market of behaving irrationally.

According to a survey by actuarial consultancy Tillinghast, U.S. D&O rates fell 9% on average in 2005, after falling 10% in 2004. This is despite rising claim frequency and severity.

"It's surprising that premiums have continued to decline while all other factors driving insurers' D&O costs are on the rise," said Jim Swanke, managing principal of the strategic risk financing practice at Tillinghast, in a statement. "We see a need for more appropriate pricing of these risks."

The consultancy says there is fierce competition in excess layers for large public companies. Premiums dropped 10% in the excess layer and 8% in the primary layer. In addition, average policy limits were increased 9% in total. Average primary limits rose 2%, while average excess limits rose 11%.

"Not surprisingly, the largest increase in limits was in the excess layer," said Michael Turk, senior consultant at Tillinghast, in a statement. "However, premium decreases of a similar magnitude were reported in both the primary and excess layers. Given the increase in excess limits and increasing claim severity, it seems counterintuitive that there is a decrease in the excess layer premium."

The frequency of claims increased 30% in 2005 compared with 2004. The average claim payout fell in four of the five claimant classes reviewed by the survey. These were employees, competitors, customers, and clients and other third parties. However, payouts increased in the class with the highest average severity of claims – shareholders. The survey notes that 52% of claims against public companies were brought by shareholders.

The market's capacity stabilised in 2005. D&O insurers provided about $1.5 billion in full-limits capacity during the year. Tillinghast expects premium decreases to flatten by the end of this year and the amount of cover offered by D&O insurers to start to decline.