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Non-medical Professional Liability Directors & Officers Liability Insurance

Non-medical Professional Liability Directors & Officers Liability Insurance. CAS Seminar on Ratemaking March 7-8, 2002. Jason Israel, ACAS, MAAA. D & O Coverage Background. Directors and Officers policies insure: directors and officers

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Non-medical Professional Liability Directors & Officers Liability Insurance

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  1. Non-medical Professional LiabilityDirectors & Officers Liability Insurance CAS Seminar on Ratemaking March 7-8, 2002 Jason Israel, ACAS, MAAA

  2. D & O Coverage Background Directors and Officers policies insure: • directors and officers • historically, only D’s & O’s, but broadened in soft market of 90’s to include entity • for wrongful acts • which are defined as any act, error or omission in their capacity as D&O.

  3. D & O Coverage Background Director’s & Officer’s provides Management Liability protection for claims coming from: • Stockholders • Employees • Government and Competitors • Customers and Clients

  4. D & O Coverage Background D&O versus EPL A typical D&O policy will provide coverage for a Director or officer against claims such as discrimination and wrongful termination. So would an EPL policy. So why do companies also buy an EPL policy? A D&O policy generally: • Has higher deductibles and/or coinsurance • Provides narrower coverage, especially defense • Covers only D&O not entities or other employees (although sometimes added by endorsement)

  5. D & O Coverage Background Where does the money go? • For publicly traded firms, shareholder (securities) claims result in the majority of the losses • For Private and not-for-profit firms • less or no exposure to shareholder claims • majority of claims are from employees

  6. D & O Historical Perspective Mid 1990’s - D&O Pricing Erosion • Reduction of Deductibles/Retentions • Introduction of Blended Program discounts (combining EPL, Fiduciary & E&O under single limit) • Multi-Year programs with significant discounts • Pricing did not recognize expansions in coverage

  7. D & O Historical Perspective Mid 1990’s - Coverage Expansion • Entity Coverage - eliminated allocation issues between D&O’s and uninsured corporation, but also lost “natural coinsurance” • Bilateral ERP’s (insured may elect, even if they choose to cancel or non-renew) • Policies non-cancelable by insurers • Broadened definition of claim to cover: • formal investigations • non-monetary demands • criminal proceedings • formal administrative proceedings

  8. D & O Historical Perspective Litigation Landscape: • 1995 PSLRA (Reform Act) • Higher Pleading Standard • Stay of Discovery • Increased Market Capitalization and Volatility • Increased IPO/M&A Activity • Increased Claims for Insider-Trading/Accounting Fraud/Revenue Recognition • Recession influences

  9. D & O Historical Perspective Litigation Landscape • Results: • Jurisdiction has changed from CA to NY • Allegations have changed from promises about future performance, now protected by disclaimers, to accounting irregularities • Dismissals without leave to refile are down, as courts allow plaintiffs to ‘figure out’ the new Act and perfect filings • Settlements lag, since plaintiffs’ cases that survive motions to dismiss are stronger than before and hence demands are higher

  10. D & O Historical Perspective Record number of large claims : • Cendant 3.5 b • Bank of America 490 m • 3Com Corp 259 m • Waste Mgmt I 220 m • Waster Mgmt II 457 m • Ikon 111 m • Informix 142 m

  11. D & O Historical Perspective • - Increased frequency: • Frequency back up to pre-Reform Act levels, with an increased number of securities filings: IPO/ Laddering cases Source: securities.stanford.edu

  12. D & O Historical Perspective A different pattern emerging for large firms? 7% 6% All Public Companies 5% Larger Firms 4% 3% 2% 1% 0% 2002 (Annualized) 1997 1998 1999 2000 2001 Source: securities.stanford.edu

  13. Actuarial Considerations Key D&O Pricing Issues/Obstacles Low Frequency High Severity Bankruptcy/Persistency Complicated Program Structures Market-based Pricing

  14. Actuarial Considerations Key D&O Pricing Considerations Ownership - Public vs. Private Size of Firm Sector Coverages/Terms/Limits provided

  15. Actuarial Modeling Modeling claim severity: Reasonable fits with Ln(Loss)= a * log(MCap) + b + e

  16. Actuarial Modeling Modeling claim severity: Much Variability remains 90 80 70 60 Actual Settlements($M) 50 40 Median Loss 30 20 10 0 .0 5.0 10.0 15.0 20.0 25.0 Model's Expected Severity ($M)

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