D&O at a Crossroads

Rates for D&O liability insurance have stabilized for most companies, but businesses with weak governance and those in high-risk industries are not out of the woods.

The directors and officers (D&O) liability insurance market is in transition, which is both good news and bad news for businesses. The good news is that premium increases have leveled off this year. Some companies have been able to purchase broader coverage with less-restrictive terms than those they've had to accept in the recent past.

"The market softening began about a year ago, with companies with market caps of less than $200 million, because underwriters viewed those companies as less likely to be sued and liable for fewer damages if they are sued," says John Schwonke, senior vice president, manager of the financial services group, with ABD Insurance and Financial Services, a Redwood City, Calif.-based brokerage firm. Since then, bigger companies have also experienced some easing in the D&O environment. The changes are being driven largely by insurers' increased capacity and new competition in the marketplace.

The bad news is that no one knows how long this relative softness will last. The D&O market has reached a crossroads. Premiums may remain stable for the foreseeable future or even decline slightly. Or they may resume their climb into the stratosphere. "Everyone is holding their breath, waiting to see what will happen," says Ann Longmore, senior vice president in the executive risks practice at Willis, a risk management services provider and insurance brokerage firm headquartered in London.

"This is a market in transition," says Lou Ann Layton, D&O practice leader at Marsh Inc. in New York City. After a couple of years of consistently raising rates and retention levels and reducing coverage, D&O providers are now looking uneasily over their shoulders as new players enter the market. As a result, "underwriters are offering broader terms to some companies," Layton notes.

However, this relaxation of terms "is not happening across the board," she says. By no means are businesses purchasing D&O policies right now assured of securing an appropriate level of coverage, with the terms and conditions they want, at a competitive price. The D&O market is still challenging for any company with a suboptimal risk profile. Businesses in certain industries -- including health care, high-tech and energy -- remain under intense scrutiny from underwriters. These companies are still seeing rate increases and restrictive terms.