Posted: November 15, 2009
A tale of two markets
Your company's fortunes directly impact executive liability coverageBrian Sandy
Your company's Directors and Officers liability policy is coming up for renewal. What can you expect from the market?
Like the Dickens classic, this is a tale of two markets. For companies with little or manageable debt, good cash flow and profits, and a decent claims history, the market has been good, with some companies seeing expansion of coverage and a decrease in pricing.
During the past two years, three of the largest writers of Executive Liability coverage, (AIG, XL and Hartford) have experienced financial problems and ratings downgrades. The combination of these dominant wounded carriers fighting to retain business, coupled with new entrants into the executive liability market, has provided sufficient capacity to keep renewal terms favorable for this segment.
For companies in the financial, construction, real estate or retail sectors and other sectors adversely affected by the downturn, as well as companies with claims issues, declining revenues, declining profits and sizeable debt loads, the market has been far less kind. Depending on the individual scenario, carriers have responded with reductions in limits, restrictions in coverage and increases in pricing and deductibles. In some cases, the pricing increases have exceeded 100 percent; in other cases, the carriers have refused to offer renewal terms.
How do I know if I will be affected?
A common thread throughout the D&O and all Executive Liability coverage lines is the financial condition and performance of your company. If you are experiencing operating losses, cash flow issues, have a sizeable debt load and/or significant debt due within the next 12-18 months, count on a tougher renewal.
In particular, companies perceived to be at risk of bankruptcy are viewed unfavorably by the underwriters due to the high likelihood of claims in a bankruptcy, and the relatively low premium levels allocated to the D&O coverage line for privately held companies. In addition to financial concerns, below are some other signs of potential trouble in your upcoming renewal:
• Presence in the financial, real estate, construction, or retail industry or any other industry adversely impacted by the downturn
• Significant layoffs
• Increased claim activity in the past year, or one sizeable claim in excess of the retention
• A significantly underfunded pension plan
• Presence of employer stock in the retirement plan
• Changes in senior management
• Change in auditors
• Sizeable impairment charge during the past year
• Significant stock drop (public companies)
What can I do?
In short, start early and be prepared. In this environment, information is king. Underwriters are asking far more questions, requiring more documentation, and requesting client meetings or conference calls. The amount of debt on your balance sheet and its terms are a particular focus for underwriters. Underwriters are looking for assurances that you are in compliance with covenants, do not anticipate a reduction in the borrowing base from a bank line re-determination, and can pay any debt due within the next 12-18 months.
Proactively provide the most current interim financial statements in addition to the year end CPA prepared statements and expect to provide more information about your business and projections for the upcoming year. The ability to provide contingency plans to funding challenges is also helpful to assuage the underwriters' concerns.
Talk to your broker about your business and budget for these lines and jointly prepare a plan for renewal. Look at alternative carriers and coverage structures to ensure you are getting the most appropriate protection for your investment.
As Director of Financial Services at IMA, Brian is responsible for Executive Liability including Directors and Officers Liability, Professional Liability, Fiduciary Liability, and Employment Practices Liability. He is a frequent speaker on the topics of Executive and Professional Liability coverage for industry associations and boards.