As the global recession spreads, speculation has grown over whether it will result in increased directors' and officers' insurance claims. Louise Meeson speaks to experts in the D&O sector to find out whether this has come to pass and whether the financial storm has impacted take-up and premium rates.
While the majority of directors' and officers' claims are brought in the US, due to the country's claimant-friendly legal system, directors and officers in the UK are increasingly exposed to lawsuits.
Not only are UK companies that operate internationally potentially open to claims brought in foreign courts, but the UK is arguably moving towards more of a US-style legal system, with developments such as the Companies Act 2006, which has extended the ability of shareholders to bring derivative actions.
On top of this, the global recession is also taking its toll. Figures from the Insolvency Service reveal 4941 companies went into liquidation in England and Wales in the first quarter of 2009, an increase of 7.1% on the previous quarter and 56% on the same period last year, which would indicate there is likely to be an upturn in claims.
Robert Cholmondeley, a director of independent financial adviser Taylor Patterson Group's corporate insurance division, says insurers have seen "noticeable increases" in the volume of D&O claims received over the last 12 months "some by possibly up to 10%".
"Speaking to one large insurer, it indicated breach of fiduciary duties claims account for up to 17% of the total, Health and Safety Executive prosecution 15%, and general financial irregularity 14%. Additionally, employment/discrimination issues account for 11% of all claims received," he adds.
"It should be remembered D&O liability claims are not frequent claims, but are costly with typical sums involved of £30 000 to £40 000. However, some claims can result in settlements of hundreds of thousands of pounds."
On the other hand, Doug Robare, D&O manager at Zurich Global Corporate, says the recession has not resulted in a surge in UK D&O claims and that the majority are filed in the US, due to the size of settlements and litigious culture.
He explains in 2008, 224 class security actions were filed in the US, which includes actions against UK companies that have US exposure, a 27% increase on the year before. In 2009, 87 class actions have been filed so far.
Similarly, Julian Martin, executive director and head of D&O at Willis, believes the level of UK claims remains "fairly flat". However, he admits: "Insurers are probably sitting on an increased portfolio of claims but they have just not matured yet."
Michael Lea, head of D&O liability at Jardine Lloyd Thompson, adds while insolvency has increased massively, related claims will take a long time to emerge and Mr Robare points out the financial crisis is likely to spark an increase in regulatory investigation, from bodies such as the Financial Services Authority, which in turn will result in a rise in claims.
There had been an increase in sub-prime-related D&O claims worldwide according to Mr Lea but he believes this has started to subside because in the first quarter of 2008 there were 50, 45 in both the second and third quarters, 36 in the fourth, 45 in the first quarter of 2009 and 23 in the second quarter.
On the other hand, John Batch, senior vice president of Marsh's Finpro practice, says while there is an increase in the number of notifications being received, they may not result in actual claims.
Although there has been concern the uptake of D&O would decrease as corporates tighten their belts in the financial storm, this does not appear to have been borne out. According to Marsh, FTSE 100 companies are buying 20% more D&O insurance than they were 12 months ago.
Mr Batch explains companies do not commonly cancel D&O and while most FTSE 100 companies already have the cover, there has been a 5% increase in take-up from the smaller FTSE 350-sized firms. Mr Martin also adds there has been a 50% increase in interest in standalone D&O cover, as opposed to combined policies, but says that this does not mean it will be translated into sales.
Paul Hopkin, technical director of the Association of Insurance and Risk Managers, believes take-up has remained stable but says companies appear to be opting for bigger limits. This is the first year Airmic has published its Directors' & Officers' Liability Insurance Benchmarking Report, so there are no previous figures to compare to, but it reveals Airmic members are opting for "significant" limits, with about a quarter buying £100m or more of D&O coverage. It shows the average policy limit for companies with US exposure is £130m, compared to £58m for those without, and average premiums are £3.7m and £1.7m respectively, for companies with more than £1bn in annual turnover.
Speaking about D&O premium rates, Mr Hopkin says "by and large, with the exception of a few sectors, the market seems fairly stable" and adds "it depends how financially distressed the sector is".
Broker Marsh has spoken of the emergence of a "dual market" for D&O in the first quarter of 2009 stating while the commercial sector has stabilised to a large extent the financial services sector is experiencing toughening market conditions with rates increasing on average from 10% to more than 50% in some cases. Similarly, Mr Lea explains while commercial rates remain competitive, financial institution rates are up about 40% on last year.
In addition, Mr Martin says: "The big financial institutions are experiencing 40 to 50% increases in premiums and the mega banks are probably higher. However, commercial firms with a good risk profile are still getting a small reduction in premium of about 5% to 10%.
It has been claimed a major reason why premiums remain competitive is because AIG has cut rates to retain business. One market source accuses AIG of creating an "artificial market", pricing down to keep clients, while another similarly says rates are more stable due to the problems faced by the insurer and its bid to retain market share.
An AIG UK spokesman responds: "The D&O market is diverse. For example, we have seen significant rate rises in the financial institutions segment which contrasts with falling rates elsewhere. Although, encouragingly, we have seen rates flatten in the past few months.
"Given our position as the biggest D&O carrier our analysis is that we have seen significantly increased market competition, which has had an impact on all insurers, including AIG."
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