1. D&O Liability: What’s Happened and What’s Ahead
Presentation Title
D&O Liability: What’s Happened and What’s Ahead
Elissa M. Sirovatka, FCAS, MAAA Principal, Tillinghast business of Towers Perrin
Saturday, May 19, 2018
CAGNY
June 1, 2005

2. The 2004 Tillinghast D&O Survey
Presentation Title
The 2004 Tillinghast D&O Survey
Saturday, May 19, 2018
Before we get into our view on the current marketplace and where we are headed, lets discuss a little bit about the context for our viewpoint…..the 2004 Tillinghast D&O Survey.
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3. Participant Characteristics
Presentation Title
2,455 organizations
15% increase in participation from 2003 survey
2,409 U.S. /46 Canadian
1,347 repeat participants
Distribution by ownership:
Country
Public
Private
Nonprofit
U.S.
30%
52%
18%
Canada
50%
17%
33%
Saturday, May 19, 2018
Highest participation since 1990
56% of U.S. participants are participated in 2003 survey.
Participation increased significantly from our 2003 survey.

4. The Current Marketplace
Presentation Title
The Current Marketplace
Saturday, May 19, 2018
Okay, now lets discuss our view of the current D&O marketplace based on the information provided by the participants in our 2004 survey.
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5. The Current D&O Marketplace
Presentation Title
First premium decreases since 1999
Capacity increased from 2003 level
Coverage restrictions eased
At the same time…
Frequency increased
Claim severity increased
Saturday, May 19, 2018
First, we saw the first decrease in premiums since our 1999 survey. This decrease is indicated by our D&O premium index which adjusts for changes in coverage changes.
And we did see coverage changes. In fact we saw coverage restrictions ease.
At the same time we saw an increase in the frequency and severity of claims. If you think about it this seems illogical, unexpected. Why would insurers be decreasing premiums and increasing coverage at a time when their costs (frequency and severity of claims) are increasing? It seems like they should be increasing premiums.
But the way the insurance industry works, this unexpected behavior is not unusual given the one item above that we haven’t yet discussed…the increase in capacity. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

6. First Premium Decreases Since 1999
Presentation Title
First Premium Decreases Since 1999
Saturday, May 19, 2018
Let’s dig a little deeper into the decreasing premiums
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7. D&O Premium Index – U.S. For-Profit Only
Presentation Title
Average Annual D&O Premium Index Decreased 10%
Year
Index Median
Index Average
1998
402
539
1999
356
503
2000
349
560
2001
397
720
2002
496
931
2003
562
1,237
2004
433
1,113
Saturday, May 19, 2018
The average of our D&O premium index decreased 10% from 2003 to 2004 after increasing 33% from 2002 to 2003.
The median of our premium index decreased to its lowest level since our 2003 survey.
The premium index measures changes in premium after adjusting for changes for changes in coverage. For example, if in 2003 an insured paid $2M in premium for a $500,000 retention and in 2004 paid $2M for a $1M retention the premium change is not 0%, but rather an increase of some amount because the insured is getting less coverage for the same premium.
The premium index increased steadily from 1999 through 2003, with the largest increase occurring from 2002 to We now see a reversal in this trend, with a decrease of 10%.
The median D&O premium index reached the lowest point since our 2001 survey.

8. Reported Change in Premium – U.S.
Presentation Title
Change in Premium by Quarter – U.S.
Saturday, May 19, 2018
Another statistic we look at to get an indication of what is happening to D&O premiums is the directional change in participants premium. Looking at this statistic we see that most participants continue to report increases in premium through the 3rd quarter of However, moving out of 2003 and into 2004 we se a greater percentage of participants reporting decreases. I’ve added the percentages on the chart here, they aren’t on your handouts. Read #’s. There is a slight dip in 3rd quarter 2004.
Most participants reported increases, but more are reporting decreases in 2004

9. Change in Average Total Premium By Ownership
Presentation Title
2003 Survey
2004 Survey
% Change
Public
$1,069,438
$893,683
-16%
Private
54,306
49,014
-10%
Nonprofit
68,121
26,175
-62%
Saturday, May 19, 2018
Average total premium decreased from our 2003 to 2004 survey regardless of ownership.

10. Change in Primary/Excess Premium for Public Entities
Presentation Title
Saturday, May 19, 2018
Excess premium for publicly owned entities decreased significantly more than primary premium.

11. Change in Primary/Excess Premium for Private and Nonprofit Entities
Presentation Title
Saturday, May 19, 2018
Primary and excess premium for private and nonprofit entities decreased relatively consistently.

12. Change in Average Total Limits Premium
Presentation Title
Business Classes with
Decreases
Business Classes with Increases
Biotechnology & pharmaceuticals
Education
Governmental & other nonprofit
Merchandising
Nonbanking financial services
Nondurable goods
Personal & business services
Petroleum, mining & agriculture
Technology
Transportation & communication
Utilities
Banking
Durable goods
Health services
Real estate & construction
Saturday, May 19, 2018
So what business classes are reporting decreases in total limits average premium from our 2003 survey? Most of them. Some of the decreases are more significant than others (Elissa add here if you can). There are four business classes that showed increases in average total limits premium.
As we look at this we need to keep in mind the change in the make up of our distribution of participants by asset size. The business classes impacted by this size change are:
Technology
NonDurable Goods
Utilities
Merchandising
Banking
Nonbanking Financial Services
Real Estate & Construction
Personal & Business Services
Biotech
Govt.

13. Change in Average Total Limits Premium
Presentation Title
Asset Size Groups with
Decreases
Asset Size Groups with Increases
Up to $10 million
Over $10 billion
$10 million to $50 million
$5 billion to $10 billion
Saturday, May 19, 2018
When we look at the change in average total limits premium by asset size group we see that the change is fairly well distributed by size. There is some concentration of decreases in the very smallest and very largest organizations, but at the same time the next smallest and next largest asset size groups experienced increases, so we can’t say that small or large organizations had the decreases.
Most asset size groups experienced no significant change in total limits premium.

14. Capacity Increased Presentation Title Saturday, May 19, 2018
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15. Insurance Carrier Capacity
Presentation Title
Full Limits Capacity (in millions) — U.S., For-Profit Only
Saturday, May 19, 2018
Capacity increased 12%….back to 2002 level.

16. Some of the New Carriers in our 2004 Survey
Presentation Title
Darwin
Endurance
Quanta
Westchester Specialty
Those only providing capacity since 2000
Arch Insurance
AWAC
Lighthouse Underwriters
MaxRe
Navigators
OneBeacon
Saturday, May 19, 2018

17. Policy Limits and Deductibles/Retentions
Presentation Title
Policy Limits and Deductibles/Retentions
Saturday, May 19, 2018
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18. Reported Change in Limits – U.S.
Presentation Title
Change in Limits by Quarter – U.S.
Saturday, May 19, 2018
More reported no change in limits in 2004 than 2003.

19. Policy Limits Increased for Most Asset Sizes
Presentation Title
Average Policy Limits by Asset Size and Survey Year
Asset Size
2003 Survey
2004 Survey
Up to $10M
$2.4
$2.5
$10M to $50M
5.2
6.4
$50M to $100M
9.2
10.0
$100M to $400M
16.0
16.1
$400M to $1B
26.8
24.7
$1B to $2B
37.7
34.3
$2B to $5B
54.8
55.9
$5B to $10B
75.0
88.4
Over $10B
126.2
158.2
Saturday, May 19, 2018

20. Change in Average Total Policy Limits
Presentation Title
Business Classes with
Most Significant Decreases
Business Classes with Significant Increases
Banking
Governmental & other nonprofit
Merchandising
Transportation & communication
Durable goods
Petroleum, mining & agriculture
Saturday, May 19, 2018

21. Reported Change in Deductibles/Retentions – U.S.
Presentation Title
Change in Deductibles/Retentions by Quarter – U.S.
Saturday, May 19, 2018
A decreasing percentage reporting increases in deductible/retentions in 2004.

22. Coverage Restrictions Eased
Presentation Title
Coverage Restrictions Eased
Saturday, May 19, 2018
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23. Changes in Enhancements by Survey Year
Presentation Title
Increase
Decrease
Same
Saturday, May 19, 2018
Market softening on enhancements after trend of reductions.

24. Changes in Exclusions by Survey Year
Presentation Title
Increase
Decrease
Same
Saturday, May 19, 2018
Market softening on exclusions after trend of increases.

25. Frequency and Claim Severity Increased
Presentation Title
Frequency and Claim Severity Increased
Saturday, May 19, 2018
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26. Repeat Participants New section to survey
Presentation Title
New section to survey
1,347 participants – “Repeat Participants”
Caution against comparing claim statistics between surveys due to change in participants
Repeat participant group increases credibility of comparisons between surveys
Characteristics of repeat participants similar to 2004 total participants, but
Larger
Greater concentration on public/private
Saturday, May 19, 2018

27. Repeat Participants: Claim Frequency and Susceptibility
Presentation Title
Claim frequency and susceptibility over 10 year period
2003 Survey
2004 Survey
% Change
Susceptibility
18%
19%
+6%
Frequency
.70
.78
+11%
Saturday, May 19, 2018
Both susceptibility and frequency increasing for repeat participants.

28. Frequency/Susceptibility by Business Class
Presentation Title
Most Significant Increases in Susceptibility
Most Significant Increases in Frequency
Banking
Education
Real estate & construction
Technology
Transportation & communication
Banking
Biotechnology & pharmaceuticals
Nonbanking financial services
Real estate & construction
Technology
Saturday, May 19, 2018
Banking and real estate & construction are the only business classes on this list and on the average premium increase list.

29. Claimant Distribution by Ownership
Presentation Title
Saturday, May 19, 2018
Majority of nonprofit claims are from employees. Majority of for profit claims are from shareholders.

30. Repeat Participants: Average Closed Claim Payment — Indemnity Only
Presentation Title
Payments to Claimants by Type of Claimant (excluding closed no pay)
Claimant Class
2003 Survey
2004 Survey
% Change
Employees/Unions/ Physicians
$220,491
$525,117
+138%
Competitors/Suppliers/ Contractors
1,154,000
1,440,000
+25%
Customers/Clients/Students
771,702
N/A
Governmental/Other
12,877,500
6,503,333
-49%
Shareholder/Investors
10,668,600
11,936,944
+12%
Saturday, May 19, 2018
Increases in 4 out of 5 claimant classes.

31. Repeat Participants: Average Closed Claim Payment — Defense Cost Only
Presentation Title
Payments to Claimants by Type of Claimant (excluding closed no pay)
Claimant Class
2003 Survey
2004 Survey
% Change
Employees/Unions/ Physicians
$129,814
$106,565
-18%
Competitors/Suppliers/ Contractors
214,333
225,723
+5%
Customers/Clients/Students
445,354
1,377,538
+209%
Governmental/Other
1,306,220
2,375,774
+82%
Shareholder/Investors
1,732,708
1,727,366 0%
Saturday, May 19, 2018
Increases in 3 out of 5 claimant classes.

32. Percentage of Open Claims
Presentation Title
Claim Disposition by Survey Year
2003 Survey
2004 Survey
% Change
Still Open Awaiting Trial
36%
54%
18pts
Tried but Being Appealed 1% 2%
1pt
Saturday, May 19, 2018
Percentage of claims open increased from 37% to 56% an increase of almost 20 percentage points.

33. Where is the D&O Marketplace Headed?
Presentation Title
Where is the D&O Marketplace Headed?
Saturday, May 19, 2018
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34. Where Is the D&O Marketplace Headed?
Presentation Title
Continued upward pressure on frequency and severity of loss
Potential for reserve strengthening on prior years
Continued rate decreases, but of a smaller magnitude
Continued pockets of rate increases
Leveling capacity
Improving coverage terms
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

35. Continued Upward Pressure on Frequency and Severity of Loss
Presentation Title
Especially on publicly traded institutions
Public attitudes towards corporate governance haven’t changed.
Headlines continue
Merck
Choicepoint
GlaxoSmithKline
Marsh
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

36. Potential for Reserve Strengthening on Prior Years
Presentation Title
Increase in percentage of open claims
Still a number of potential mega claims to be settled
Tyco
Global Crossing
Greatest potential for strengthening may be in the reinsurance community
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

37. Continued Rate Decreases
Presentation Title
…..but of a smaller magnitude
Low single digits
Private and nonprofits
Most likely in excess layers for public traded companies
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

38. Continued Pockets of Rate Increases
Presentation Title
For some business classes
Particularly business classes with increasing frequency
Banking
Biotechnology and pharmaceuticals
Nonbanking financial services
Real estate and construction
Technology
Some saw increases in 2004….could be safe in 2005
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

39. No flood of new players as in prior years
Leveling Capacity
Presentation Title
No flood of new players as in prior years
Reinsurers may be cutting back capacity to insurers
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

40. Improving Coverage Terms
Presentation Title
Way for insurers to compete
Expect
Flat or slightly increasing limits
Flat retentions/deductibles
More increases in enhancements
More reductions in exclusions
Saturday, May 19, 2018
Decreasing premiums at a time of increasing frequency and severity seems illogical, unexpected.
But the way the insurance industry works, this unexpected behavior is not unusual.
It is driven by the increase in capacity in the D&O marketplace. As that capacity enters the marketplace, long term carriers are forced to lower their premiums to compete with the new carriers (new capacity).
Lets look more at what the survey shows about each of these pieces of the state of the current D&O marketplace.

41. Presentation Title
Questions?
Saturday, May 19, 2018
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