Rising Cost Of D&O Insurance

Today’s Wall Street Journal (subscrip. req.) has a feature article on the rising cost of directors and officers liability insurance (for more on this topic see this post in The 10b-5 Daily). Insurers are both raising premiums and “holding firm on many of their efforts to rein in the generous terms and conditions they adopted during a price war in the late 1990s.” A side graph identifies AIG (34% of premiums; 19% of policies) and Chubb (16% of premiums; 21% of policies) as the D&O insurance leaders.

Quote of note: “And while the reforms of the Sarbanes-Oxley corporate-governance act may reduce corporate scandals, in the near future they could prove expensive. For example, the law increases the responsibility of audit-committee members for overseeing the company’s audits, potentially raising the stakes for individual committee members if problems are later found. ‘There’s a general confusion about what Sarbanes-Oxley really means,’ says Bill Cotter, chief underwriting officer for National Union Fire Insurance Co., of Pittsburgh, a unit of American International Group Inc., the leading underwriter of D &O insurance. ‘The fear is that it will be defined through litigation.'”

Quote of note II: “Companies have a variety of options to mitigate higher costs. These include buying less coverage and retaining more of their risk with higher deductibles or co-insurance, in which the policyholder pays a fixed portion of eventual claims, much as health-insurance often requires patients to pay part of their costs, brokers say. Deductibles, recently $1 million or even lower on even large policies, have risen to as high as $100 million. Co-insurance of 10% to 30% or more has become more commonplace as well.”

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