The falling cost of responsibility

At the peak of the hard market, the initials of directors' and officers' (D&O) insurance might have stood for doubling and overpriced.

Now they mean dwindling and on-the-slide.

"Some FTSE100 companies may see a 30%-50% decreases in their D&O premiums this year," says Simon Brookes, director in the financial and professional risks unit of Heath Lambert.

"At the smaller end of the UK D&O market, you could be looking at 50%-60% off last year's rate."

Cover taken out by companies to insure their executives against being sued has arguably always been expensive, though underwriters claimed they were subsidising its cost with premiums for other cover.

Soaring premiums

Then Enron, WorldCom and a host of other US corporate scandals sent premiums soaring. For a while that continued even as the overall commercial market was softening. No more.

Nick Foord-Kelcey, managing director, in the financial and professional practice at Marsh, says: "Most renewals over the past few months will have enjoyed double-digit savings that reflect the softening market. It is our view that legislative developments will result in reductions in claims costs to insurers, resulting further in downward pressure on prices." So that's it: D&O now stands for despondency and ominous signs for the future.

Or does it? Brookes adds that the average reduction will be about 15%-25%.

Michael Lea, partner in the financial risks unit of Jardine Lloyd Thompson, agrees.

"For companies that do not have US shareholders, we are seeing decreases in D&O premiums of between 10% and 25%," he says.

"Last year, rates fell by a similar amount and 2003 was flat so this is the third year of a soft market. Premiums are still higher now than they were post 9/11, but only slightly higher."

Rates are falling in most commercial insurance classes in the London market. But with D&O, there are specific reasons for what is happening.

"The main reason D&O rates have fallen is increased competition in the UK primary D&O insurance market, which has traditionally been dominated by AIG, Chubb and Ace," says Lea.

"Those three groups have themselves responded by launching new forms for cover and the result is a softer market where underwriters are competing on price and also on policy content.

"It is a fairly benign claims environment in the UK with regard to D&O. There really have not been that many high profile claims and some large US and Bermuda groups have decided that they have the appetite to come into the UK primary business."

It is certainly true that there are now more players in the UK D&O arena.

Axis, XL, HCC and Liberty are all active competitors in the primary market and Catlin launched into D&O last year.

There are other combatants too. "AIG has dominated the D&O market around the world since time immemorial," says Adam Codrington, director at Aon Professional Risks. "But new capacity came in during 2003 and people have been gearing up. Companies in the UK D&O market are prepared to write bigger lines and take larger shares of deals."

Lea says the more competitive market is seeing companies gain in other ways apart from lower premiums.

"Cover is changing in the UK," he says. "Primary cover forms now have significantly enhanced cover. There are fewer exclusions."

Cover increasingly includes the affirmation of defence costs in corporate killing cases and "insured versus insured" cases of directors suing each other or subsidiaries suing their parent companies, he says.

Darren Westly, D&O class underwriter for Catlin UK, says "It is tough; it is competitive in the UK market. There is pressure on rates and underwriters are trying to hold the line."

He sees small company D&O cover falling by 5%-10% this year and improvements to policies such as extended reporting periods. "We are in a downward cycle in general and D&O is dragging that," he says.

Underwriters and brokers both stress that the D&O market for UK firms with American listings or shareholders is very different from that of British groups with no US connections.

Brookes says: "These are two very different sectors. There are not that many claims in the UK. Most of the claims are driven by the US.

Class actions

"There is no slowing in the number of class actions lodged against US companies and average settlement values are rising. Claims show no sign of dissipating yet premiums are coming down in the US too."

Lea points out that for the global D&O market as a whole, premiums are being offered at a deficit to claims. No one in the market expects this trend to reverse soon, however.

What other developments could change the market? Foord-Kelcey says: "Right now, litigation against the former directors of Equitable Life is being heard in court. As this case proceeds, it will be the most significant review of directors' liabilities under English law. Its outcome will be of great interest to all directors."

He also believes that recent changes to the Companies Act, enhancing the ability of companies to indemnify directors and advance defence costs will lead to a "more favourable regime for directors".

Westly agrees that this change is "one to watch" but is sceptical at calls for UK directors to face criminal charges for failing to provide full information to auditors.

"If a director is found guilty in a criminal court, D&O cover stops anyway," he says, "but it will pay legal expenses until that point. We specifically cover litigation counsel costs and I cannot say that we would change that. It is one of the selling points of our policy."