Upfront: In the Eye of the D&O Storm

Directors and officers (D&O) insurance premiums have been easing recently, but the respite will likely be short, according to the 2004 Directors and Officers Liability Survey, a study of more than 2,000 companies in the United States and Canada conducted by the Tillinghast division of Towers Perrin. Although survey respondents' premiums dropped by 10 percent on average from 2003 to 2004, claim susceptibility, frequency and severity continued to climb.

Much of the current softening in the D&O market can be attributed to the entrance of new capacity, according to the study. Capacity increased 11 percent to $1.5 billion in full limits last year, and 99 percent of U.S. survey participants reported having D&O insurance. However, respondents who also participated in a comparable Tillinghast survey in 2003 reported that their year-over-year claim frequency increased an average 11 percent.

"This soft market for D&O insurance will be shorter and less pronounced due to lower investment returns than in the 1980s, when cash flow underwriting was prevalent," reports Jim Swanke, Minneapolis-based managing principal for Tillinghast's strategic risk financing practice. "Carriers will likely need to begin increasing rates in the short to medium term in order to maintain their return on equity."