PLUS: D&O Recovery Depends on More Discipline

Insurers must become more disciplined, underwrite more strictly, educate their insureds and price risks correctly if they expect the directors and officers liability market to improve, according to speakers at the PLUS D&O Liability & Insurance Issues Symposium.

“Current rates are not adequately priced and there are environmental and economic reasons that are still out there,” said Robert Cox, senior vice president, Chubb Specialty. “It is an industry that still hasn’t learned its lessons. It is an industry that still needs rate changes.”

“While the mutual-fund scandal is making it harder for asset-management companies to insure directors and officers, many mutual-fund clients don’t think it’s going to affect the way they are priced or underwritten, but they are mistaken,” maintained Michael Cavallaro, managing director, ARC Excess & Surplus, LLC.

John A. Rafferty, vice president and national D&O manager, Hartford Financial, noted that it’s “always the other guy undercutting. The discipline is so elusive. We got our prices wrong in 1998-99. What had originally been a short-term expectation was much worse than that. We need to look at our business and think about what we’re doing. Who’s being overly optimistic and who’s being conservative? Those who are conservative will be here for the long run.”

Greg Flood, chief operating officer, National Union Fire Insurance Company, said that the results worsened beyond expectations. Referencing the mutual-fund scandal, he noted that most industries don’t have a three-year tail.

“It’s a luxury most industries don’t have,” he said. “You’re not honest with yourself if you think the market is doing well when you have three years to correct the problems.”

Jeffrey R. Lattmann, managing director, Marsh Inc. FINPRO, New York, who moderated the panel, asked whether D&O will be sold differently a year or two from now.

Cavallaro said that what has happened in the market has changed the dynamics of how the product is sold. “There will be more voice to the outside director, more marketing to them. Brokers will be asked more and more to come to the board meeting,” he said. “Outside directors who want to serve on a board will bring in their own attorneys.”

Anthony Giacco, senior vice president, Executive Liability Underwriters, noted that the industry has gotten smarter over the last few years and is asking the relevant questions. “If things keep going the way they are, rather than a new product or approach, things should be done more easily.”

Todd Jones, executive vice president, Willis of Pennsylvania, Radnor, Pa., said the industry needs to spend more time educating clients on legislative issues. “Make sure you don’t get blind-sided,” he said. “There may be as much uncertainty today as years ago.”

Rafferty agreed, noting that clients are displeased. “They say, ‘We’re not Enron, we’re not a mutual fund; we should be treated differently.’ Yet it seems weekly there’s a formal SEC investigation. We need to do a better job of educating our clients, explaining the bigger picture.”

Rafferty also believes brokers are underestimating the state attorneys general, the SEC and whistle blowers. “2003 was an okay year, but one year means nothing. The loss costs in this business are going to be tremendous.”