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D&O prices much softer for companies with best loss history

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Even some risks that generally aren't attractive to directors and officers liability insurers are finding good deals in the softening D&O marketplace.

During midyear renewals, risk managers typically negotiated 5% to 15% rate cuts and obtained broader coverage terms and conditions, according to brokers, underwriters and buyers.

"Underwriters may disagree, but it's softer today than it was a year ago," said Lou Ann Layton, a managing director and the national D&O practice leader for Marsh Inc. of New York.

Rate reductions have been "a self-fulfilling prophecy of the broker world," said Evan Rosenberg, a senior vp with Chubb Corp. unit Chubb Special Insurance of Warren, N.J.

"I would describe the current market as much more about coverage than price," Mr. Rosenberg said.

Market executives and risk managers agreed that buyers have been negotiating coverage improvements. Many of the modifications amount to tweaking, but some of the changes are significant, they said.

Market executives do not expect the market to change by Jan. 1 renewals.

While rate cuts generally fall into the 5% to 15% range, some risk managers are negotiating even better deals, Ms. Layton said.

Meanwhile, risks with the biggest market capitalizations are getting slightly smaller rate cuts--5% to 10%--because of the frequency and severity of claims they face, Mr. Rosenberg said.

Underwriters continue to consider some industry sectors as problematic risks. Insurer and broker executives most often point to biomedical and pharmaceutical, financial institutions, health care, homebuilding, retail and technology risks as problem sectors.

Those risks have been able to negotiate only small rate cuts if they had a good loss experience, and those with poor experience have seen rate hikes, said Greg Flood, president of New York-based IronPro, a unit of Ironshore Insurance Ltd. of Hamilton, Bermuda.

Financial institutions were the toughest risks in coverage negotiations, but those with a good loss experience were able to get small rate cuts, Ms. Layton said.

Regardless of a risk's industry sector, it faced a tougher renewal if it recently was involved in securities class action litigation, investigated by a governmental body, reported a weaker financial picture or was a takeover target, Ms. Layton said.

But even some tough risks were not disappointed during their latest renewals.

For example, Sun Microsystems Inc. of Broomfield, Colo., saw indications during its early June renewal negotiations that insurers would cut their rates 10% to 15% for the technology company, said Kevin Hoskinson, director of global risk management.

Plano, Texas-based Triad Hospitals Inc. negotiated an 8% rate cut when it renewed its D&O coverage on May 12--after negotiating a 10% decrease last year, said Judith Camp, director of insurance and risk management for the hospital organization.

Besides being a health care risk, Triad is being acquired by Community Health Systems Inc. of Franklin. Tenn., Ms. Camp said. In addition, Triad faces five shareholder lawsuits over an earlier, but now abandoned, effort to take the organization private.

"Our D&O underwriters were comfortable with us, though," especially since the eight-year-old spinoff from HCA Inc. had no previous losses, Ms. Camp said.

Tough as well as attractive risks have ample capacity available to them, according to market executives. Worldwide market capacity remains between $1 billion and $1.5 billion, though no buyer can obtain more than about $600 million of limits, they said.

The D&O market makes the least amount of capacity available to financial institutions, but even in that sector risk managers have been able to buy the coverage they require, Ms. Layton said.

"There isn't a client out there that wanted to buy more limits than we could secure for them," she said.

Privately held and nonprofit organizations have a greater amount of capacity available to them than publicly held companies do, said Brian Inselberg, the New York-based president of two divisions at National Union Fire Insurance Co. of Pittsburgh, Pa., that cover private and nonprofit organizations and midsize publicly held companies.

Meanwhile, some market executives suggest that the demand for Side A-only towers of limits has reached a plateau (see story, page 19).

Besides pricing deals and ample capacity, D&O insurance buyers are taking advantage of soft market conditions to improve coverage, market executives and risk managers said.

"A lot of coverage is being negotiated," Chubb's Mr. Rosenberg said. "We're losing or getting accounts over coverage more so than over price," he said.

For example, Chubb has begun offering buyers the option of keeping or eliminating a conduct exclusion in their policies. The exclusion in the past has triggered some coverage disputes when buyers wanted to indemnify officials facing criminal charges but the insurer would not extend coverage to the organization under Side B of the policy.

"We're aligning our interest with theirs" to eliminate the cost of determining "who's good and who's bad," Mr. Rosenberg said. The coverage modification "is forcing the insured to evaluate why they buy the insurance and who they buy it for."

Several market executives said that insurance buyers have been able to only tweak coverage terms and conditions, because underwriters already have broadened their coverage substantially in recent years.

"Most of those contracts have been pretty well diluted over the past couple years," Mr. Flood said.

Ms. Layton said that while coverage provided in off-the-shelf policy forms is not as broad as it was during the last soft market, manuscripted coverage is now more favorable to buyers.

For example, Ms. Layton said, policy language "has gotten much better" for buyers in the areas of excluded conduct, severability of coverage for innocent and guilty officials, the definition of applications and the insurer's ability to rescind coverage.

Tougher areas

But in other areas, the coverage remains more restrictive. For example, underwriters will not reimburse buyers for any portion of their retention that is used to cover defense costs in a lawsuit that ultimately ends without any court award or settlement, she said. In the last soft market insurers refunded retentions under those circumstances, she said.

Buyers should expect the market to remain soft, said Steve Shappell, managing director of the legal and claims practice for Aon Corp. unit Aon Financial Services Group in Denver.

Still, insurers are assessing the impact that class action litigation over stock option backdating will have on losses, he said.

"There's lots of litigation, but it's not impacting insurers much" right now, Mr. Shappell said.

He said defense costs in those lawsuits have not approached the "astronomical" amounts that securities class action lawsuits can generate, because the options are canceled and attorneys "are paid something and the case goes away."