Many corporations with US exposure have had trouble getting D&O cover, and others are facing huge premium rises. Ben Cook reports on the frantic search for cover
A few weeks ago there was talk of HSBC having difficulties renewing its directors' and officers' (D&O) cover at the beginning of May. It may not be easy. As a financial services company with US exposure, HSBC represents the type of risk that D&O underwriters will shy away from.
"Companies that have major exposures in the US are finding the cost of their D&O cover has increased considerably," says Kelvin Curran, a partner at broker FirstCity.
"The increases in the cost of cover have been anything from 40% to 300%."
As well as having to pay significantly larger premiums, financial services companies are finding that their insurers are incorporating an increasing number of exclusions into D&O policies.
Insurers themselves are being hit by sizeable premium increases when buying their own D&O cover.
AIG announced this month that the cost of its D&O insurance had increased by nearly 60%.
Cover crisis
AIG paid a premium of $2.85m (£1.79m) for the year ending May 2003, a 58% increase on the $1.8m (£1.13m) it paid in 2002.
It is a nightmare situation for brokers who find themselves frantically searching for D&O cover at a price the client wants and can afford.
And the problem is not confined to the financial sector.
"We're having enormous problems, particularly in business sectors such as pharmaceuticals, IT and motor," says Curran.
"We had a major £100m renewal last year - we managed to renew the first £50m of cover, but it took us four months to secure the further £50m of cover."
It may take longer in the current hard D&O market to find cover at a price agreeable to the client, but it seems that the capacity is available.
"The capacity is there and this is proved by the fact we've just managed to get $400m worth of cover for a client," says Nick Foord-Kelcey, D&O practice head at Marsh UK.
But finding a good price for excess layers of D&O insurance is proving to be quite a challenge for brokers.
"The problems exist when it comes to insuring the higher limits of indemnity," says Foord-Kelcey.
He cites the example of many of his US-listed clients.
"When you're looking for, say, $400m of cover, you can run into problems when trying to ensure the last $100m."
"The increase in the cost of excess layers of D&O cover shows that underwriters are anticipating bigger claims in the UK."
The scale of the premium increases has, in some cases, been astronomical. Earlier this month, Marsh UK said the cost of D&O cover had risen by up to 1,000% in some areas.
New players
But Foord-Kelcey says this is atypical, that in fact the cost of excess layers of D&O cover is set to drop.
"There may be one or two clients who have seen their premiums increase by 1,000%, but that paints an inaccurate picture."
Indeed, Toby Foster, chief executive of Marsh's UK retail operations was recently quoted as saying 300% to 400% increases are the norm.
But Foord-Kelcey is adamant that such hefty price hikes, particularly in the cost of excess layers of D&O cover, will soon be a thing of the past. "I believe D&O premiums will be extremely profitable for excess-layer insurers and I believe this will attract new players to the market place which will, in turn, bring the price of the excess layers down."
Indeed, rumours of an imminent injection of new capacity into the D&O market are already circulating.
Former director of professional liabilities at ACE Global Markets, Stuart Wright, is to head a currently unnamed insurer which will write mainly PI business.
US giant WR Berkley Corporation will back the new company.
Meanwhile, Lloyd's underwriter Beazley has announced that it will be re-entering the D&O market.
D&O mutual
And Hiscox recently announced that it is expecting to increase its D&O business by 400% in 2003.
An increase in market capacity may put an end to speculation that a mutual will be formed to meet the current D&O demand.
According to one insurance lawyer, the idea of forming a D&O mutual is a non-starter.
"I think there would be numerous problems in trying to form a mutual", he says.
"For example, there's the issue of whether or not companies would be prepared to divert funds into a mutual as the company is the primary claimant."
While there may be sufficient capacity in the market to make it unnecessary to form a D&O mutual, companies will be forced to pay massive premiums for their D&O cover, particularly the excess layers, for some time to come.
"I feel we are at the peak of the market and will be for the next few months," says Foord-Kelcey.
HSBC may have to part with a small fortune to secure D&O cover this year, but it can expect to get a better deal next time around.
