cas seminar on reinsurance – philadelphia, pa june 2-3, 2003 directors’ & officers’...
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CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Directors’ & Officers’ Liability
Peter J. Schultheiss, FCASVice PresidentZurich North America Specialties
Joseph ReschiniActuarial AssistantThe Hartford
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
AGENDA
•Frequency
•Severity
•Monitor Prices
•Rating Variables
•Q&A
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Pure Premium
Pure Premium =
Claim Frequency * Claim Severity
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Historical Securities Fraud Class Actions
164202
163
231
188
108
173
238206 214
488
263
0
50
100
150
200
250
300
350
400
450
500
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Fed Securities ClassAction
Source: Stanford Law School Securities Class Action Clearinghouse
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Claim Frequency
Assumed Securities Claims: 250 - 300
Approximately 10,000 - 11,000 Companies
Frequency of claims 2.5% - 3.0%
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Claim Costs by Type
Claimant Class Median Average
Payments to Claimants:Employees/Unions/Physicians 40K 245KShareholder/Investors 4.9M 17.2M
Defense CostsEmployees/Unions/Physicians 30K 105KShareholder/Investors 450K 1.05M
Source: Tillinghast - Towers Perrin “2001 Directors and Officers Liability Survey”
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Some Large Settlements
*Market Cap
Cendant 33.7B
Bank of America 95.4B
3Com Corporation 22.4B
*At Beginning of Class Period
# Source: Stanford Law School Securities Class Action Clearinghouse
Drop in Cap
11.8B
32.3B
13.5B
#Settlement
3.525B
490M
259M
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Assumed Cost Per Mil
Frequency = 2.5% - 3.0%
Securities Class Action Severity - Assume Policy Limit
Assumed Cost Per Mil = 25K - 30K
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Average Price Per Mil by IndustryMedian Total Average Est PricePremium Total Limits Per Mil
Biotech & Pharm 90,100 10.2 8,833Technology 80,000 13.76 5,814Personal & Business Services 90,500 16.94 5,342Merchandising 150,738 32.81 4,594Durable Goods Manufacturing 154,327 36.73 4,202Transportation & Communication 116,025 28.83 4,024Petroleum, Mining & Agric 153,000 40.26 3,800Non Durable Goods Manufacturing 139,500 37.29 3,741Banking 170,000 48.82 3,482Education 30,729 9.8 3,136Utilities 215,880 69.09 3,125Health Svcs 58,432 20.64 2,831Construction & Real Estate 19,398 9.26 2,095Non-Banking Financial Svcs 66,935 36.73 1,822Govt & Other Non Profit 3,450 3.6 958
Source: Tillinghast - Towers Perrin “2001 Directors and Officers Liability Survey”
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
MONITORING PRICES
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Objective
Measure the premium adequacy of all new and renewal policies written in the current year against all new and renewal policies written in the prior year
New business can be monitoredNo “rate change”Rate adequacy
If exclude newUnderstate increases in hard marketsUnderstate decreases in soft marketsMiss multi-year renewals
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Process
“Normalize” premiums to account for varying coverage parameters
Contrast w/Benchmarking and base rates
Reliance on judgment for class relativities,
other parameters
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Process
XYZ Corp.
Expiring Renewal
Premium $100,000 $300,000
Limits $10 million $20 million
“ILF” 1.0 2.0
“Normalized Premium” $100,000 $150,000
Rate Change 50%
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Rating Factors
ILF
Limit
Retention
Attachment Point
Part Of/Quota Share Arrangement
Exposure Base
Term
Industry Group
Public or Private
Prior Acts Exclusions
Side A only
Pre-set Allocation
Coinsurance
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Rating Factors
Public vs. Private
Public company exposure is mostly class action suits
Private company exposure is mostly EPL
Term
Multi-years now annual
3 year terms had been commonplace 2 years ago
2.25 factors
Today – “unwinding” the discount
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Rating Factors
Class of Business
Class relativities rely on judgment
Data available, but very limited (see class action suits)
Side A Only
Recent phenomenon
Reaction to “Enronitis”
Removes large portion of risk
D and O reimbursement only, no company reimbursement
Bankruptcy and derivative cases
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
D&O ExamplePRIOR YEAR
POLICY LIMIT SIR ATT PTASSET SIZE
(000s) TERM GWP ILFEXPOSURE
FACTORINDUSTRY
FACTORADJ
PREMIUM
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1 15,000,000 25,000 15,000,000 160,000 1 45,000 2.02 4.67 1.00 4,7702 20,000,000 1,000,000 30,000,000 6,000,000 1 115,000 1.74 13.33 1.70 2,9173 10,000,000 100,000 0 350,000 1 101,000 4.17 5.33 1.50 3,0294 15,000,000 250,000 0 1,100,000 1 250,000 5.55 8.00 1.00 5,6315 10,000,000 350,000 25,000,000 1,200,000 1 45,000 1.50 8.00 1.60 2,344
PRIOR YEAR TOTAL 556,000 4,261
CURRENT YEAR
POLICY LIMIT SIR ATT PT
ASSET SIZE
(000s) TERM GWP ILFEXPOSURE
FACTORINDUSTRY
FACTORADJ
PREMIUMPRICE
CHANGE
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)
1-renewal 15,000,000 125,000 15,000,000 125,000 1 55,000 2.02 4.00 1.00 6,807 42.7%2-renewal 20,000,000 1,000,000 30,000,000 8,000,000 1 215,000 1.74 13.33 1.70 5,453 87.0%3-renewal 10,000,000 100,000 0 400,000 1 140,000 4.17 5.33 1.50 4,199 38.6%4-renewal 15,000,000 250,000 0 1,250,000 1 295,000 5.55 8.00 1.00 6,644 18.0%6-new 10,000,000 500,000 30,000,000 3,000,000 1 190,000 1.42 11.33 1.50 7,873
CURRENT YEAR TOTAL 895,000 6,246 46.6%
%6.461261,4
246,61
PREMIUM ADJ TOTAL YEAR PRIOR
PREMIUM ADJ TOTAL YEAR CURRENT CHANGE PRICE YEAR CURRENT
FACTOR INDUSTRYFACTOR EXPOSUREILFTERMGWP PREMIUM ADJUSTED
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
D&O Example
Price Change Effects
1. Renewal
2. Non-renewal
3. New
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
D&O Example
Renewal
Easiest to quantify
Non-renewal
Most subtle
Effect from prior policy “dropping off”
New
No actual price “change”
Presence of new policy does change rate level
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Asset Size
PROS
Easy to Obtain/Verify
Correlates with Exposure to Loss
Accepted by Industry/Insured
CONS
Quality of Assets?
Correlates - NOT a Proxy
Asset Size - Not Market Cap
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Average Limit Purchased
Average Limit Purchased
$0$20$40$60$80
$100$120$140$160
< 10
M
10M
- 50
M
50M
- 10
0M
100M
- 40
0M
400M
- 1B
1B -
2B
2B -
5B
5B -
10B
> 10
B
Size Of Firm
Avg
Po
licy
Lim
it (
Mil
lio
ns)
By Asset Size
By Mkt Cap
Source: Tillinghast - Towers Perrin “2001 Directors and Officers Liability Survey”
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Public Vs. Private Loss Drivers
Public D&O
Severity - Securities Class Action Suits
Frequency - Employment Related (usually within SIR)
Private D&O
Severity - Private Placement Suits (Securities usually excluded)
Frequency - Employment Related (usually insured)
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Common Claims by Claimant
ShareholderStock or Public Offering
Inadequate/Inaccurate Disclosure
Fraud (including Accounting)
Restatement of Earnings
EmployeeWrongful Termination
Discrimination
Harassment
Breach of Contract
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
How is D&O Loss Handled Under:
Deductible/Self Insured Retention
Coinsurance
Pre-Set Allocation
ASSUME: Loss = 25MSIR = 1MCoinsurance = 20%Pre-Set Allocation = 20%Policy Limit = 25M
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Self Insured Retention
Covered Loss = 25M
Insured Pays 1M
Insurer Pays 24M
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Coinsurance
Loss = 25M
Insured Pays 20% Coinsurance (5M)
Insurer Pays 20M
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Pre-Set Allocation
Loss = 25M
Pre-Set Allocation = 20%
Loss Not Covered = 20% (5M)
Insurer Pays 20M
Similar results as Coinsurance except in the case of an Insured Bankruptcy.
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Charge for Entity Coverage
Early 90s First Offered - Customary Charge = 10%
Late 90s - Thrown In
Today - Big Losses for Insurance Companies/Big Bucks forPlaintiff Bar Firms (Looking for Entity to Kick in BeyondInsurance Proceeds)
Average Allocation to Entity Used to Be 30%-35%
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Other Rating ConsiderationsChange in Auditors
Severability
Insider Stock Sales
Leverage Ratio
Financial Condition
Quality of Balance Sheet
Sarbanes Oxley?
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Sarbanes-Oxley Act
New certification requirementsCEO’s and CFO’s must sign
Reviewed financials and not misleading
False certifications mean fines up to $5 million and imprisonment up to 20 years
Audit servicesAccounting firms not to provide other services
E.g. consulting, legal, etc.
Audit CommitteesMust be independent
Cannot be employed by affiliated co. of issuer
CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003CAS Seminar on Reinsurance – Philadelphia, PA June 2-3, 2003
Sarbanes-Oxley Act
Rotation of lead auditor
Statute of Limitations
Increased to 2 years/5 years from 1 year/3 years
Effect of lengthening class periods plaintiffs allege
Insider sale limitations
Prohibition of loans to D’s and O’s
Disgorgement of ill-gotten profits
Increased SEC budget