New Reality: Less for More

Coping with the bear market in directors' and officers' liability insurance.

Going without D&O insurance simply isn’t an option for a public company. And, ironically, there is plenty of insurance out there, observes James Swanke, a principal with Tillinghast- Towers Perrin and head of its strategic risk financing practice. “There’s more capacity today than there was two or three years ago. You just have to pass through the rigorous underwriting screen and cherry-picking process that they’ve set up.”

Kris Frieswick (krisfrieswick@ cfo.com) is a staff writer at CFO.

Looking for Mr. Good Premium

In today’s directors’ and officers’ insurance market, a lot of risk managers feel like wallflowers at the high school dance. But with a quick makeover, it is possible to attract an insurer that’s willing to offer the right coverage at a reasonable premium. Here’s how.

Return to risk management.

Risk managers who shopped their policies during the soft market are feeling the brunt of premium increases today. “Risk management is not just the insurance-buying department,” says Rich Sarnie, director of risk management at Iselin, New Jersey-based Engelhard Corp., a materials science and surface chemistry company that renewed its D&O policy in November 2001 with only a 10 percent premium increase. He attributes the low increase to a strong, long-standing relationship with his carrier. “It doesn’t happen overnight,” says Sarnie. “You try to establish a very good relationship with a few good insurers across your entire portfolio. Then you spread the risk so they’ll be less likely to sock it to you when the market turns.”

Start the renewal process early.

The month before your policy expires is way too late, says James Swanke, a principal with Tillinghast-Towers Perrin.

Have open communication with both your broker and primary insurer.

“Ultimately,” says Jim Proferes, deputy D&O underwriting manager for The Chubb Group of Insurance Cos., “it’s the character and the quality of the individuals we’re insuring [that determine premiums]. We find great value in face-to-face meetings to discuss their strategy, financial position, and returns, as well as corporate-governance procedures.”

If you’ve got dark spots on your claims history, claims pending, or off-balance-sheet liabilities, now is the time to reveal them.

Complete your submission in a professional manner.

Be armed with information about your company’s corporate risk-management procedures, audit-committee charter, merger-and-acquisition due-diligence procedures, insider-trading policies, and employment-practices education, advises Proferes.

Make sure your application is complete and honest.

Dot your i’s and cross your t’s, counsels Swanke, and don’t put anything on the application that could even remotely be construed as misleading or fraudulent.

Make your application easy to read.

The easier it is to read, the faster it will be read, says Swanke.

Consider a captive, or self-insure a portion of total risk.

Captives can reduce or stabilize costs, improve control over coverage and claim settlements, gain access to the reinsurance market, and improve cash flow and coverage continuity. They also cost a lot to capitalize and run, can increase company exposure to excessive settlements, and can be difficult to structure due to the nature of D&O insurance. “These are low-frequency, high-severity incidents,” says Swanke. “It’s hard to project what your losses would be year to year, so how do you finance that?” He advises his clients who are looking for alternatives to self-insure a portion of the risk, “to the point where a traditional or reinsurance carrier is willing to attach.” – K.F.

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