Competition, Regulation and Katrina a Concern at PLUS D&O Symposium

Wrapping up the PLUS D&O West Symposium held Sept. 13-14 in San Francisco, senior management personnel from insurers, brokerage firms, corporations and law firms concluded that competition is shaping the current and future directors and officers liability insurance market. With the continuing large number of insurers and reinsurers in the D&O marketplace and the resulting struggle for market share, many aspects of the industry are being reshaped, according to the conference organizers. More entrants have emerged in the past year as well, further fueling competition.

There’s no doubt “competition is a reality in business,” said Lisa Butera, a symposium panelist and executive vice president of the Public Company Management Liability Unit and director of field operations for National Union Fire Insurance Company of Pittsburg, a member company of American International Companies.

In particular, recent issues such as severability, fraud exclusions, whistleblowers and requirements stemming from the Sarbanes-Oxley Act of 2002 are making it a difficult time to be an underwriter.

“These are complex issues,” Butera said. “Once you get to the contract and product, a lot of time and effort is put into that to put it together for clients.”

Kathleen Pickard, risk manager for Solectron Corp., also believed competition was noticeable. “[The industry] is competitive,” she said. “There is abundant capacity and an eagerness to write the business.”

From a broker standpoint, however, such competition makes the D&O marketplace a healthy one in which to do business. “There’s a good supply and demand curve,” said Douglas J. Morton, chairman of Woodruff-Sawyer and Co. “There’s adequate supply to meet the needs of clients.”

Meanwhile, as competition increases, regulations also are affecting the industry, according to many of the symposium panelists. “Regulation is more prevalent and widespread,” said Greg Flood, executive vice president and COO of National Union Fire Insurance Co. That increase combined with the trends in the extraction of payments from individual directors is making it difficult to attract people to sit on boards and be directors.

And the “regulator pressure will continue to confound us for years to come,” Flood added.

Agents and brokers should therefore work with their clients to ensure they understand the coverages, panelists said. For example, D&O is designed to cover major issues, and employment practices liability coverage is priced accordingly to fill in the gaps in D&O, according to Laurie Sablak, assistant vice president and product manager in Chubb Specialty.

Severability and rescission also should be considered as important parts of a D&O policy, panelists said. The threat of rescission affects the leverage that the carrier has because it decreases with severability, explained Nikki Locker of Sonsini, Goodrich and Rosati. Rescissions have increased in recent months because of the continuing increase in frequency and severity in securities fraud litigation.

Despite the challenges, however, the D&O insurance-buying community seems to be informed and sophisticated, panelists agreed. “Clients and directors are so well informed, directors are not only starting to ask for and attend seminars, but in some instances, they are retaining individual advisors,” Locker said. “Directors are knowledgeable, they are asking about severability, Side A, stand-alone IDL, DIC. They’re very well-informed and asking the right questions.”

Finally, the fallout from Hurricane Katrina and subsequent flooding garnered attention at the symposium. Many attendees questioned speakers about the effects that would have on the industry.

“Katrina could trickle into our world as property/casualty,” Butera said.

Peter McKeegan, senior vice president of the Executive Assurance Group at Arch Insurance Group, agreed that the capital being issued to deal with the disaster will put pressure on reinsurance capacity.

Yet National Union Fire Insurance Co.’s Flood said more facts were needed before the industry could understand the Hurricane’s effect. “I don’t think the facts are there on losses,” he said, “but as we reach a critical level of losses, it will have a ripple effect. But they’re saying, comparatively speaking, that the industry is better reserved than in 2001.

“The critical thing,” Flood continued, “is how much will go out to losses. Reconstruction costs put pressure on losses. It’s way too early to say it will not have an effect. I think it will have a profound effect and ultimately we’ll feel a shakeout.”

The PLUS D&O West Symposium included two days of panel discussions on D&O liability issues affecting the legal and insurance marketplace. Conference topics included: “New Frontiers in Fiduciary Liability: Employers Stock, Cash Balance Conversions and Beyond,” Employee/Former Employee Cooperation with Government Investigators and Plaintiffs’ Class-Action Counsel,” “The EPL Marketplace in California and Other Western States,” “Effects of the Spitzer Investigation on the Reinsurance Market,” and “Employed Lawyers Coverage: Is a D&O Policy Good Enough?”

According to PLUS, 200 attendees and 23 speakers, including keynote speaker Honorable Henry Low (ret.), former insurance commissioner of California and Special Master and referee at the Judicial Arbitration and Mediation Services Inc. (JAMS) attended the symposium.

Kimberly Holland, PLUS director of communications, said the West event will be held again in 2006.