The future of the directors' and officers' market is set to be interesting, especially in light of continued competitive pressures coupled with expectations of increased actions but, as Edward Murray discovers, only time will tell
Over-capacity in the directors' and officers' liability insurance market has certainly had an impact on rates and policy wordings over recent years, and double-digit falls in premiums during 2005 were the norm from many carriers.
How things will pan out this year remains to be seen but unless capacity tightens it seems pricing will remain fierce, despite some carriers pushing their proposition over rate stabilisation. A range of regulatory and legislative issues are also threatening to change the D&O landscape, although exactly how they will impact rates, wordings and claims experiences remains speculative.
In its quarter-four review of the market for 2005, Willis highlighted a slowdown in the rate reductions that had been seen earlier in the year and predicted this would continue into 2006.
This seems to have been borne out over the past three months but, with an overload of capacity, it is unlikely rates will actually begin to harden in the coming months. Despite the extra capacity, some of the major carriers in the market are loath to offer further cuts simply to follow the trend, and believe those accounts that have seen reductions may have been taken as far as they can go.
Patrick Drinan, European D&O manager at Ace, comments: "If you take accounts that have seen a reduction in the past two years, many of them will now be at a point where further reductions are difficult to warrant given the dynamics of the current legal and regulatory environment."
Mr Drinan questions what the newer D&O insurers in the market have to offer outside of price and whether they have a long term commitment to this class of business. "While price is very important the key consideration must be the local and international in-house claims handling capabilities given that D&O is designed to protect the personal liabilities of directors and officers."
While there is no doubt that insurers in this market welcome competition, some fear that the newer players may be storing up trouble for the future and do not have the claims experience to justify their present actions.
Rick Welsh, head of D&O at SVB, says: "When you look at some of the wordings, it is difficult to know how they are going to work on the price given."
Mr Welsh says some players coming into the market may not have the level of experience held by the more traditional players. "Some of the Lloyd's syndicates are not D&O specialists but are now quoting primary terms, and there are also some syndicates that have taken on those with broking backgrounds to grow their D&O book," he explains.
Tim Finch, D&O underwriter at Brit Insurance, agrees: "It is tough when people come in and straight away consider the market over-priced and want to undercut what the rest of the established market is doing."
He says that, as an underwriter, it is important to maintain discipline - if the price or terms and conditions are not right, then insurers should come off the risk. "You really have to watch what others are doing on terms and conditions - whether they are doing that to a sensible enough degree is debatable."
Of course, the proof of the pudding will be in how well insurers handle the claims that come in, and whether they decide to remain in the market in the long term.
Gerard van Loon, D&O specialist at Liberty International Underwriters, believes this will be where firms will set themselves apart. "Claims is where the differentiation will play itself out. The more claims that are made, the more opportunity there is to differentiate and show it is not all about price but also about servicing," he explains.
Are we likely to see more claims hit the UK market? Almost certainly and not necessarily - if at all - from a more US-styled class action approach. The biggest rise in claims is set to come from the increasingly sophisticated business environment in which firms are operating.
As the Financial Services Authority and other regulators continue to flex their muscles, and the incoming Company Law Reform Bill takes hold, it will be interesting to watch parts of the D&O market. It could well become defined by smaller but more frequent claims, which are set to replace the larger more irregular claims that have traditionally characterised this market.
Indeed, a recent survey of 150 insurance buyers by AIG found there was a huge expectation of increasing actions against directors - 83% of respondents were worried about increased litigation against directors, and 91% felt shareholder activism would increase. The biggest fear - where 97% voiced concern - centred on trustee exposures.
The key point here is that the Company Law Reform Bill, likely to come into force next year, will make it easier to pinpoint where wrongdoing has occurred, and so empower shareholders. As the Willis report states: "It does take a significant step in granting shareholders a cause of action against directors."
The biggest growth area for D&O insurance is set to be the small-to-medium-sized enterprise market, which, according to Mark Wakefield, executive director at Willis, remains the least saturated.
Mark Shreeve, chairman of Angel Underwriting, agrees: "At the level that we specialise in, there is less competition and it is an area principally ignored by many insurers."
How long Mr Shreeve retains what he believes to be his competitive advantage in this hotly contested market remains to be seen. Elsewhere, others will be keeping their eyes on wordings and rates, keenly watching and waiting to see how the market will handle future claims.
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