There is a great deal of information available about the liabilities of publicly traded companies, as well as about the D&O insurance implications arising from those liabilities. It can be a bit of a challenge to locate the same of information concerning private companies. For that reason, it is fortunate that Advisen and AIG have teamed up to produce a new report focused just on private companies.
The report, entitled “The Private Eye: Spotlight on the U.S. Private D&O Market” (here) provides a brief overview of the liabilities of directors and officers of private companies as well as of the private company D&O insurance marketplace. The report also includes useful information about private company D&O insurance buying patterns and the results of a D&O insurance buyer survey. The report also includes a brief review of emerging exposures as well an analysis of D&O insurance pricing trends.
The report’s analysis of D&O insurance buying takes a look at patterns over the last ten years. Among other things, the report shows that the average premium paid by private companies with annual revenues of up to $50 million is $15,851 for an average policy limit of $2.6 million. Companies with revenues between $50 million and $100 million pay an average of $50,000 for average limits of around $5 million. Industries that pay higher premiums include manufacturing, transportation, communications, utilities and the general services sector.
According to the report, the “most useful” metric for analyzing premiums and buying patterns is the average rate per million paid by private companies. The report presents a graphic analysis of the rate per million paid by industry and year, as well as by company size and year. The report shows that over time since 2003, the rate per million paid by private and non-profit companies of all sizes has tended downward. The biggest declines during that period have been for companies with revenues over $1 billion. As shown later in the report, the rates have started to trend up in more recent years.
The report also incorporates a client survey. As the report itself emphasizes the survey of over 260 private company D&O insurance buyers is heavily weighted toward larger companies, with well over half of the respondents representing companies with over $1 billion in revenues and only about 17% of respondents representing companies with revenues under $250 million.
The survey of these generally larger companies showed that over 90 percent of respondents purchase D&O insurance, with around a third of the respondents buying limits of $10 million or less. On the other hand, 16% of these mostly larger company respondents purchased limits of greater than $96 million.
Among the survey respondents reporting an increase in limits purchased, the most common reason for the increase was to buy a separate tower of A-Side insurance or to an excess layer of A-Side protection. The report notes that “this uptick in A-Side D&O purchase is further evidence of the product’s heightened importance.”
The survey also noted that only 17 percent of respondents had been the subject of a D&O claim during the previous three years. Of those who suffered a claim, 48 percent were shareholder suits, 33 percent were client lawsuits, and vendor lawsuits represented 21 percent. 50 percent of the claims that resulted in a settlement were resolved for under $250,000 with only 25 percent settling for greater for greater than $1 million. On the other hand, from interpreting the bar graph in the report, it does look as if just about 20 percent of the claims settled for over $5 million, which is consistent with the oft-stated principle that D&O claims tend to be low frequency and high severity. Interestingly, 88% of the respondents who reported a claim reported satisfaction with the claims handling process.
The survey also revealed that there are a host of emerging boardroom concerns, including cyber liability, M&A, and private equity litigation, as well as claims relating to the Fair Labor Standards Act. The report includes a brief survey of these and other emerging issues.
The report also includes an overview of current private company D&O insurance pricing trends. The report notes that “private company D&O rates are increasing across the board,” with a consistent increase in renewal premiums and rate per million over the last 18 months. Advisen’s own data analysis shows that while rates remain below 2008 levels, pricing has been on the rise since the third quarter of 2001.
The report also notes that “anecdotally, carriers tell us that rate increases of around ten percent are being achieved” during 2013 on private company D&O insurance accounts, “with up to 30 percent rate increases being applied at renewal on certain accounts” – although this analysis does not account for companies that change hands between insurers on renewal, which may be renewing at rates reflecting little or no increase. Overall, the increases are not necessarily focused just on “claim-afflicted accounts,” but rather are the result of a “re-underwriting process” across the entire portfolio. Underwriters are assessing premiums, retentions and coverage in order to try to “reflect the actual risk profile of private and non-profit accounts.”
The report also includes a brief overview of private company D&O claims trends. The report notes that “private company D&O claims are varied in the source and in their process.” While there is a perception that shareholders are the principle source of D&O claims, “this perspective overlooks the fact that the plaintiffs in D&O claims include a much broader array of claimants than just shareholders. D&O claims plaintiffs also include customers, vendors, competitors, suppliers, regulators, creditors and a host of others.” The report concludes with a brief review (with claims examples) of private company liability exposures in four areas: bankruptcy; shareholder suits; consumer suits; and competitor actions.
Those who work frequently will find this report useful. Though the data in the report have a definite emphasis toward larger companies, even those practitioners who do not regularly work with private companies with, say, revenues over $1 billion, will find this report worthwhile. In particular, practitioners may find it helpful to be able to cite this report to help their private company D&O insurance clients understand recent pricing trends, to be able to put the premium increases they are seeing on their renewals into context.
Practitioners may also find it helpful to refer to the claims information showing that D&O claims originate from a wide variety of claimants, which helps to explain why smaller companies that have few shareholders nevertheless should consider buying D&O insurance.
We can certainly hope that Advisen will continue to produce this report on an annual basis and perhaps in future years provide more detailed information with respect to companies with revenues under $250 million—that is, information that would be relevant and of interest to the vast majority of private companies and to their advisors.