One of the most challenging assignments for those of us in the D&O insurance business is to try to explain to those outside the industry how D&O insurance pricing works. The explanation is difficult enough as a general matter, but it is often even more difficult to explain in connection with a specific transaction. The difficulty of the explanation is itself a reflection of a number of features of the current marketplace for D&O insurance.
Among the reason for the difficulty of the explanation are the expectations of many insurance buyers. Because of superabundant capacity and rampant competition, D&O insurers have managed to create an environment where many buyers simply expect a price reduction every year.
But for all the downward pricing pressures in a competitive insurance environment, some insurance underwriters at least some of the time still try to segment applicants by risk and price accordingly. There are corporate attributes that even in today’s hyper competitive insurance marketplace will militate against aggressive pricing competition. These factors include, for example, financial instability, past litigation or regulatory activity, adverse business developments, management changes, and maturing debt. By the same token, relatively young companies or development stage companies will always be viewed differently than more mature companies, and companies in certain industries will always be considered more risky than other companies.
Looking at it objectively, it makes perfect sense that D&O underwriters might want to try to segment applicants by their relative risk exposures and price accordingly. D&O insurance remains a high severity product. Insured companies and their management are often blindsided by the bad news that leads to claims. The claims can be enormously expensive to defend and settle – in fact, they have been becoming more expensive to defend and settle for years, and at a rate much greater than the rate of general economic inflation.
The astonishing thing about the D&O insurance marketplace is that despite the pervasiveness and unpredictability of the risk exposure, the marketplace continues to attract new competitors. In a field where there has been abundant insurance capacity and downward pressure on prices for years, new players still continue to appear and existing players continue to try to expand their portfolios.
Growing capacity chasing a finite number of opportunities means that there inevitably will be further downward pressure on prices, despite an adverse claims environment. In addition to downward pricing pressure, there is also outward pressure on the expansiveness of available terms and conditions. As a result, many D&O insurance buyers continue to enjoy the ability to purchase relatively favorable insurance protection at relatively attractive prices.
However, even in today’s competitive marketplace, not every company will see only reduced costs. The D&O insurance marketplace can sometimes seem completely crazy, but it is not always completely illogical. From time to time, the marketplace even manifests that most remote and elusive of all insurance industry phenomena – “underwriting discipline.”
The point is that even in a highly competitive insurance marketplace, some insurance buyers are going to pay more for their D&O insurance than other buyers. And even in a competitive insurance marketplace, companies whose risk profiles changed during the policy year may well find themselves paying more for their renewal policy than they did for their current policy. Companies perceived as riskier may not see their insurance cost decline, even if the companies operating history during the policy year generally has been positive.
The chronic lack of discipline that so often characterizes the D&O insurance marketplace makes the occasional outbreak of underwriting discipline that much harder to explain when it makes one of its sporadic appearances. For that reason, it can be critically important for companies’ insurance advisors to set expectations at the outset of the insurance placement process.
Insurance advisors also have a role to play in helping buyers to understand the pricing alternatives available in the marketplace, particularly if the pricing available reflects something other than a pricing decrease.
But the advisors’ efforts to explain marketplace pricing can be completely undercut by a couple of kinds of marketplace unpredictability. The first involves carriers whose pricing decisions are inconsistent and therefore challenging to anticipate. The second involves carriers whose different individual underwriters produce differing pricing determinations. Both of these types of inconsistencies can be difficult to explain, but the problems arising when the same carriers’ underwriters are inconsistent among themselves can be a particularly vexing.
No one likes surprises, and that is particularly so when it comes to big ticket expenses like D&O insurance. It is unlikely that pricing surprises can ever be completely eliminated, particularly because the surprise can be the result of expectations and assumptions that might not have been realistic to start with. The possibility for unwelcome pricing surprises be reduces by focused efforts to match expectations the marketplace realities. And finally, carriers can do their part too though the consistency with which they conduct themselves in the marketplace.
The Name Game: I am sure I am not alone among Americans who find place names in England particularly interesting. For example, one of the pleasures of the London underground is the memorable names of many of the stops. I am not only thinking here of the splendor of some of the more triumphant names, like “Elephant and Castle,” “Knightsbridge,” or “Vauxhall.” I am thinking more of the names that have that particularly British distinctiveness, such as the termination point of the Piccadilly line service, which is announced by a business-like female voice this way: “This is the Piccadilly line service to Cockfosters. (Pause.) Please mind the gap (pause) between the train (pause) and the platform.” Or on another line: “This is the District line service to Barking. (Pause.) Please mind the gap (pause) between the train (pause) and the platform.”
My fascination with interesting names is among the reasons why I feel compelled to follow English football. The pervasive presence of international players in the English premier league contributes a certain musicality to many of the team rosters.
Among the names I often wind up repeating to myself is that of the Ivorian defenseman playing for Manchester City, Yaya Touré. Another name with the same kind of pleasing musicality is that of the Cameroonian now playing for Tottenham Hotspur, Benôit Assou-Ekotto. Other names that I find oddly compelling are those of Peter Odomwinge, a Nigerian now playing for West Bromwich Albion, and José Bosingwa, the Portuguese player for Chelsea. There are also the players whose names convey a definite staccato rhythm, like the Bulgarian player for Manchester United, Dimitar Berbatov, or drumbeat finality, like the Dutch wingman for Liverpool, Dirk Kuyt (“kowt”).
(Just as an aside, it is worth noting that Silicon Valley venture capitalist Michael Moritz wrote an April 4, 2011 editorial in the Wall Street Journal about the immigration lessons of English Premier League football.)
The aural magic of so many of these names is enhanced by the way the TV announcers will track the progress of the ball during the game by simply stating the last names of the players involved. An example involving, say, an offensive set by Chelsea, might go something like this “Cech …Essien … Anelka … Kalou …Malouda …Drogba. Malouda. Drogba!!!!” (The enjoyment of this litany is significantly enhanced when accompanied by ritually appropriate quantities of beer.)
And then there are the players’ nicknames. For example, the back of the jersey of Manchester United forward Javier Hernández bears his nickname, “Chicharito” (“little pea”). The second best all time nickname is that of Fitz Hall, who plays for the Queens Park Rangers in the npower Championship League. His nickname is “One Size.”
Which brings me to the all time, indoor/outdoor world champion nickname. The nickname does not in fact have anything to do with English football, but it is simply too good to omit from this discussion. The nickname is that of my college classmate, Tom Glasscock, who was known as “STP” (for “See-Through P—s.’ )
Blog Update: Some readers may have seen my recent post (here) in which I raised the question of whether or not the Berkshire board could really be held liable for David Sokol’s trades in Lubrizol shares. UCLA Law Professor Stepen Bainbridge has added a post to his blog (here), in which he answers my qustion. The answer according to Bainbridge is "no" for reasons he explains furhter on his site, with reference to the attempts a few years ago to hold the board of Martha Stewart’s company liable for Stewart’s own insider trading.