Securities-related claims are rising dramatically in the US so UK underwriters are reviewing their directors' and officers' exposure. Janet Edey reports
Following reports of larger than usual losses in directors' and officers' risks (D&O) in the US, underwriters have been scrutinising the UK markets for signs that the trend has crossed the Atlantic.
US statistics show that the principal reason for such large losses has been the dramatic increase in the number and size of securities-related claims.
The numbers speak for themselves. Securities-related lawsuits soared to 487 in 2001, after remaining at around 200 for several years previously. And the average class action securities claim now is settled for about $20m (£13.9m), compared with $5m (£3.5m) to $10m(£6.9m) in the mid-1990s.
But non-US companies are not immune to these claims, as they have an increasing presence in the US. The number of major UK and Irish-based companies listed in the US has more than doubled to 124 in 2001 from 59 in 1995, and such companies have exposure to class action claims.
Claims by European shareholders have yet to impact D&O underwriters' portfolios in the same way, though in the UK class actions are emerging and lawyers recognise their potential. Moreover, as escalating numbers of directors find themselves embroiled in regulatory proceedings in the UK, the legal expenses cover afforded by many D&O policies is regularly called upon.
The bankruptcy of a number of high profile global firms, such as Enron, K Mart and Global Crossing, has drawn attention to the risks faced by D&O underwriters.
However, with loss ratios for D&O accounts previously up, the market had already started to harden the world over, particularly for cover afforded to the management of large corporations with US shareholders.
While shareholders are closely examining their investments in companies with exposures in the US, D&O underwriters' reaction to rising exposure has been three-fold: increased rates - the market has been hardening for the past year; tightening of cover; and withdrawal of capacity - particularly reinsurance.
The areas in which cover has been tightened include: multi-year programmes; discovery provisions; larger deductibles (particularly for US-securities claims); co-insurance for entity cover; cost extensions in investigations; and blanket outside-directorship cover.
Looking to the future, D&O underwriters will be thinking hard about the extent to which annual reports provide an adequate indication of corporate health. There may well be more searching questions from underwriters as they probe potential clients' financial condition at the proposal stage, to ensure that a company's financial state is an open book available to all stakeholders.
Janet Edey is corporate manager at Financial Lines Executive
