A Tale of Two Markets

Are your D&O premiums about to soar? That depends on which industry you're in.

“I wouldn’t be surprised to see some banks take a $200 million deductible,” he adds. “Carriers are simply uncomfortable insuring the primary layer of troubled firms unless it’s nearly a dollar for a dollar. At that point you might as well self-insure.”

The Last Details

Nevertheless, insurance brokers insist that stable and reputable firms — the two-thirds not named in securities litigation — can reap much better D&O deals than their distressed brethren. “With a lot of hard work, you can differentiate yourself with underwriters and still do reasonably well,” says William A. Boeck, a senior vice president of the Lockton Financial Services group at insurance brokerage Lockton Cos.

To get a break, commercial firms should demonstrate the merits of their liquidity, debt obligations, balance-sheet soundness, and other financial metrics. “If your story is a really good one, there is still a chance of a flat renewal,” says Lou Ann Layton, a managing director at global insurance broker Marsh. “If you didn’t take TARP money you have something to boast about [to insurers]. If you took it but can show you really didn’t need it, you can still distinguish yourself. That’s the key.”

That’s what Russell Investments did. “You need to determine the issues the insurance markets are concerned about and then position your risk- control system and business model as being different,” says global risk manager Jeffrey Vernor. “If you don’t have known claims problems, there is little evidence to warrant a significant D&O premium increase.” Nevertheless, Vernor acknowledges that the firm’s D&O premium at renewal increased slightly. “It wasn’t flat, but it was reasonable,” he says.

Bank of New York Mellon fared even better, renewing its D&O policy at the same premium in its expiring policy. “We differentiated ourselves by pointing out that we’re not a commercial bank per se,” says Carmelo Casella, vice president of corporate insurance. “Since our merger with Mellon and the sale of our retail branches to JPMorgan Chase, we’ve focused on asset management, securities servicing, and treasury services. We also don’t have much subprime exposure, particularly relative to others in the banking industry, and even though we got TARP money, we took only $3 billion and not $25 billion like other firms. Our capital ratios remain strong.”

Warren Mula, chairman of insurance broker Aon ‘s U.S. retail business, has additional advice. “It’s vital for the CFO to make an appearance during the renewal process,” he says. “A CFO is best-equipped to convey to underwriters that this is an organization that anticipates problems, knows where its risks are, is very closely managed, and would not bear a risk that falls outside its own and industry best practices.”

Better days may lie ahead. Significant decreases in D&O litigation are anticipated, if for no other reason than all the big fish have already been reeled in. “Litigation activity against the financial sector may decline next year because the supply of new defendants might be drying up,” says Grundfest of Stanford Law School’s clearinghouse. A single D&O market for all industry sectors may yet rise again.


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