ams: The following is one of several articles I have read with the same theme i.e. there has been a significant increase in D&O insurance costs. No matter what you think, that is a fact. I believe we are all aware of your concern, but your continuous harping on the subject no longer serves any purpose,.
From the October 17, 2003 print edition
D&O insurance costs spike after corporate scandals
Michael Muckian
Special to Atlanta Business Chronicle
When the directors and officers insurance coverage policy at A.O. Smith Corp. expired June 30, corporate risk manager Pat Cauwenbergh prepared for a significant spike in rates.
The $1.5 billion manufacturer of electric motors and water heaters, which has its headquarters in Milwaukee, had paid $170,000 per year on a three-year contract that provided $30 million worth of protection to Smith's officers and directors.
Cauwenbergh was correct to expect a jump. The new one-year policy's cost, which raised coverage 25 percent to $40 million, jumped to $600,000, an increase of 200 percent when coverage changes are factored, Cauwenbergh said. "That's a big number, but it's less than the 300 to 400 percent increases other companies have seen," he said.
A.O. Smith's Midwestern location and stable management team helped keep the increase from being even more massive, Cauwenbergh said.
A.O. Smith is one of many companies shouldering increased directors and officers -- D&O for short -- costs thanks in part to the Sarbanes-Oxley Act, passed in July 2002. New regulations, along with a tougher insurance market driven by social and economic trends, have raised business insurance rates in general, and D&O rates in particular.
The result is increased premiums paid by all companies to cover their boards and executives. Public companies that are subject to greater regulatory oversight have a much higher price to pay.
"New regulations have put directors under scrutiny that goes beyond balance-sheet questions," said Jim Povlich, senior vice president in the Milwaukee office of Marsh USA Inc., a major D&O coverage provider.
In the wake of corporate scandals, regulators are taking a harder look at company management and board oversight policies and activities, Povlich said. Increased pressures on board performance mean higher accountability levels, which insurers translate as greater risk, he said.
For public companies, D&O insurance costs have increased precipitously, according to an April survey of public companies nationwide, conducted by Foley & Lardner, a Milwaukee law firm.
Companies responding to the survey said they've experienced a 100 percent to 300 percent D&O insurance premium increase since the enactment of Sarbanes-Oxley. Companies just coming off the standard three-year insurance contract cycle had especially dramatic jumps in premium costs, according to survey results.
Those hit hardest are technology, software and health-care companies that are subject to greater market fluctuations and liability claims. Insurers are not only increasing premiums but also providing less protection when policies renew.
Companies are making changes to their policies, including lower coverage caps and increased co-insurance.
Increased claims severity in recent years has significantly driven up premiums, Povlich said. Claims that once settled for between $5 million and $10 million have now reached an average of $26 million, he said.
"It's loss experience, not speculation on Sarbanes-Oxley's potential effect, that's raising premium rates," Povlich said.
Claims related to the Sept. 11, 2001, terrorist attacks have increased activity, while underperformance in the stock market has reduced insurance companies' investment income.
D&O insurance costs for privately held companies -- which are not directly subject to the new regulatory scrutiny -- have risen less than other types of business insurance, said Rick Kalscheuer, a commercial insurance account executive with R&R Insurance Services Inc., in Waukesha, Wis.
In an insurance rate increase environment averaging between 5 percent and 20 percent, D&O coverage for privately held companies has gone up just 3 percent, Kalscheuer said. Lack of regulator scrutiny makes the difference, he said.
Muckian writes for The Business Journal of Milwaukee, a sister paper of Atlanta Business Chronicle.
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