More than one-third of all publicly traded companies have increased their directors and officers (D&O) liability insurance limits thus far in 2011, while only 2 percent of companies decreased them. This is the largest increase in limits purchasing since 2008. Only 2.1 percent of companies have purchased lower D&O limits in 2011, a decrease from 4.3 percent, 5.5 percent, and 4.9 percent in the three years prior.

Directors and Officers Liability Insurance Purchasing Trends (for Publicly Traded Companies)

There are many reasons why organizations may be electing to change their D&O limits.

• First, the market for D&O insurance has been relatively soft for the past eight quarters. To date in the third quarter of 2011, average primary rates have decreased 5.5 percent and total program rates have dropped an average of 6.3 percent (see the September 2011 edition of Marsh Insights: Benchmarking Trends).
• Second, such factors as excess capital in the overall insurance sector, continued profits for most management liability insurers, and relatively stable class action claim trends have combined to create a favorable environment for insureds. Organizations are able to add protection by increasing limits while keeping their overall costs stable.
• Third is the increase in regulatory scrutiny. A number of government actions and regulations—including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010—are beginning to affect the D&O market and increase the exposures of directors and officers. Provisions in the Act include incentives to whistleblowers, making some eligible for substantial “bounties” in proceedings where the Securities and Exchange Commission (SEC) collects more than $1 million in fines or penalties. Such incentives could trigger significant regulatory activity and follow-on civil litigation.

Directors and Officers Liability for Publicly Traded Companies: Change in Limits Year Over Year

When segmented by market capitalization, it becomes clear that large- and mid-cap companies are increasing their D&O limits in larger numbers than small- and micro-cap organizations. More than 40 percent of companies with a market capitalization of at least $2 billion elected to increase their limits, compared with only 18 percent of companies with a market capitalization of $301 million or less. No companies in the large-cap segment purchased lower limits, which may reflect the fact that higher settlement values tend to be highly correlated with large companies. Apart from the mid-cap space, the percentage of companies purchasing smaller limits fell below 2 percent.

This trend is likely to persist as companies continue to face a changing and increasingly active regulatory environment. Additionally, general soft market conditions are expected to remain throughout 2011, providing an opportunity for insureds to achieve improved terms and conditions and/or increased limits while maintaining costs.

Publisher’s Note: Marsh Insights: Benchmarking Trends is a monthly newsletter covering purchasing behavior and pricing trends for four groups of coverages: property, casualty, financial and professional, and environmental. Each month, we highlight a key trend or dynamic piece of data for a select coverage and analyze its potential effect on the insurance marketplace. The real-time data for the Benchmarking Trends is sourced from Marsh’s Global Benchmarking Portal.

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