Directors’ & Officers’
Liability (D&O) Insurance
Benchmarking Report 2013
1. Executive Summary ...4
2. D&O benchmarking survey ...6
3. D&O insurance arrangements ...8
4. Risk manager role and responsibilities ...10
5. Presentation of underwriting information ...11
6. Structure of D&O insurance programs ...12
7. D&O limits and premium ...14
8. Communication of D&O information ...16
9. Claims handling arrangements ...17
10. D&O policy assurance ...19
Contents
Directors’ and Officers’ Liability (D&O) insurance continues to be the class of insurance that is of most concern to directors, including non-executive, in an organisation. The Airmic D&O benchmarking study enables risk managers to compare their D&O program against their peers and report comparisons to the board. This is an especially valuable exercise in the current dynamic litigation environment.
The Airmic survey received 109 complete responses and several more partial responses across a wide range of business sectors and company sizes and structures. The survey, therefore, represents a worthwhile insight into the D&O purchasing arrangements and protocols of Airmic members. The various figures and tables in this report provide insight into D&O limits purchased and premiums paid for the coverage purchased.
Risk managers are involved in buying the appropriate insurance, designing and recommending an appropriate program, disclosing material facts and reporting material changes to insurers. Information is usually collected by risk managers making enquiries across the whole organisation, although nearly a third depend exclusively on information available at head office. Most risk managers buy additional local policies because it is required by law, demanded by local directors or because it provides local coverage needs.
The overall conclusion from this survey is that the purchasing patterns and the terms and conditions of D&O insurance have not changed significantly since the last Airmic D&O insurance benchmarking exercise in 2011. Insurance premium rates, program structures and deductibles, as well as limits of indemnity purchased are substantially the same as in 2011. This survey discovered that financial institutions and leisure, IT and telecoms companies purchase the highest limits of indemnity; although financial institutions and legal and business support have the highest premium spend.
In 85% of cases, details of the D&O insurance program is communicated to the board, including non-executive directors, but only about 50% of risk managers communicate with group legal department. As expected, it was confirmed that non-executive directors and other board directors are the most concerned about the D&O insurance program, followed by other senior members of management, including the CFO, company secretary, risk manager and the CEO.
The survey discovered that one particular issue has received more attention over the past two years and that is the formal review of policy terms and conditions. This is often carried out by internal or external legal advisers. Also, this report describes increased concern about the need to establish more detailed formalised procedures for responding to an insurance claim or a notified circumstance that may lead to a claim.
“In 85% of cases, details of the D&O insurance program is communicated to the board, including non- executive directors, but only about 50%
of risk managers communicate with group legal department. ”
1. Executive Summary
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Benchmarking Report: Directors’ & Officers’ Liability (D&O) Insurance
In summary, the key findings of the Airmic benchmarking survey 2013 are set out below:
1. Most risk managers present their D&O renewal information on a proposal form for the whole company with the majority also supplying a copy of their annual report and accounts, although it was noted that formal meetings with underwriters only take place in 20% of cases
2. About 10% of risk managers buy Side A cover only for D&O insurance;
50% buy Side A and Side B cover only, with two thirds securing a zero deductible on Side B cover; and the remaining 40% of risk managers buy Side A, Side B and Side C cover
3. Typically, a public limited company purchases about £200 million of cover with lower limits for other types of legal status and about 50% of the companies responding to the survey buy £50 million or less of D&O cover
4. 85% of risk managers obtain assurance on the efficacy of their D&O coverage based on a review of policy wordings by the brokers with 65%
also relying on brokers opinion that the best cover available in the market has been secured
5. About half of the risk managers had no change in premium on renewal or secured a reduction of 10% or less at the last renewal and more than half the risk managers have purchased the same limit of indemnity over the preceding three years
6. The majority of organisations expect their legal department or legal advisers to take control of any claim using established procedures, although it was reported that almost 50% of organisations expect their risk manager to be involved with the management of any claims that arise
The expectation of most risk managers seems to be that D&O rates will not increase in the next few years. However, some risk managers expect rates to reduce because of greater attention to governance standards. One risk manager commented that “recent worldwide improvements in corporate governance and the implementation of enterprise risk management should lead to a reduction in claims and hence premiums in future years”.
2. D&O benchmarking survey
A total of 109 Airmic members responded in full to the Airmic D&O survey in 2013 and this provided a worthwhile basis for analysis of D&O insurance purchasing patterns. Respondents were mainly from large companies representing a broad spectrum of industry groups. One fifth of participating companies have an annual turnover of more than £10 billion, with a total of two thirds having a turnover of more than £1 billion.
Respondents were widely distributed across industry sectors, as shown in Figure 1. The largest sectors represented are “Financial institutions” (17%), “Power, water and utilities” (14%), “Retail and distribution” (13%) and “Industrial and manufacturing (10%).
Over 50% of respondents represent public limited companies with more than three quarters of the survey participants from companies incorporated in the UK.
Whilst a quarter of the companies operate in the UK only, it was notable at the other extreme that 34% of those responding to the survey operate in more than 31 countries. This indicates that many risk managers purchasing D&O policies have complex multi-national compliance issues to understand and manage.
The range of company sizes responding to the survey is shown in Figure 2.
There was a wide distribution of the size of companies responding to the survey. Approximately one third of all respondents were in the turnover range
£1 billion to 5 billion. This wide range of responses represents a good spread of companies responding to the survey, so that worthwhile conclusions can be drawn.
Figure 1:
Principal company activity
3% Natural resources and mining 3% Leisure, hotel and travel 2% Legal and business support 4% Food, drink and tobacco 4% Aerospace and Defence
5% Construction and civil engineering 8% Property, housing and real estate 8% Media, IT and telecoms
9% Charity, NHS or local authority 10% Industrial and manufacturing 13% Retail and distribution 14% Power, water and utilities 17% Financial institutions
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Benchmarking Report: Directors’ & Officers’ Liability (D&O) Insurance
2% Under £10 million
3% £10 million to £100 million 12% £100 million to £500 million 15% £500 million to £1 billion 34% £1 billion to £5 billion 15% £5 billion to £10 billion 4% £10 billion to £50 billion 2% Over £50 billion
Figure 3 provides a summary of the status of the companies responding to the survey. A range of ownership status of organisations was noted in the survey responses, although nearly half of the companies responding were public limited companies with the main listing in the UK. 22% of responding companies were privately owned or non-listed and 14% of organisations were public sector, charity or non-government organisations. This demonstrates that D&O insurance is an important consideration for all companies, including those that are not publicly listed.
46% Public limited company, main listing in UK
22% Privately - owned / non-listed company 14% Public sector organisation / charity / non-government organisation 9% Company limited by guarantee
7% Public limited company, main listing in Europe 2% Public limited company, main listing in US
The wide range of organisations responding to the survey provided a comprehensive insight into the overall purchasing patterns for directors’ and officers’ liability insurance. However, in some cases they were insufficient companies in a particular sector or of a particular legal status to enable detailed comparisons to be undertaken.
There was a wide range of geographical spread covered by the companies that responded to the survey. 26% of companies were UK operations only with a further 40% of companies operating in between two and 30 different countries.
The largest single category of companies responding to the survey (34%) operated in more than 31 different territories. This demonstrates that a very wide range of international companies are Airmic members and, as a consequence, D&O insurance programs purchased in London have to cover a very diverse range of company structures, activities and territories.
Figure 2:
Annual turnover
Figure 3:
Ownership status
3. D&O insurance arrangements
Figure 4 provides an insight into the geographical structure of D&O
insurance programs purchased by Airmic members. 35% of the companies responding to the survey purchase multi-national policies with local policies where necessary and a further 30% have a multi-national policy that covers all operations. 20% of organisations have a UK based policy only because they operate from a single location with a further 13% having a UK policy only, but they operate from more than one location in the UK.
The vast majority of organisations recognise that directors’ and officers’ liability insurance is required across the whole range of operations and not just for head office personnel. Nevertheless, it was noted that 2% of the organisations responding to the survey provide insurance cover for their head office operations only.
0 5 10 15 20 25 30 35
Multi-national policy for head office operations only UK only policy (more than one location) UK only policy (single location) Multi-national policy for all operations Multi-national policy with local policies, where necessary
A question was asked about how many countries within the group purchase separate or local D&O policies. 44% of organisations confirmed that they purchase a global D&O policy with a local policy in only one further location.
A further 19% confirmed that they purchase between two and five local D&O policies to operate under the global policy.
This indicates that risk managers tend to identify only a small number of additional territories where D&O insurance cover is required in addition to the global program. When local D&O cover is purchased, Table 1 illustrates the reasons for this purchase. As one risk manager explained, local policies are purchased “to meet best practice requirements”. Sometimes, there are several reasons to buy local cover: “combination of reasons, such as legislation and regulations, demand for directors, advice from brokers and advice from lawyers”.
However, it was noted from the survey results that 38% of companies do not purchase local D&O cover.
Where local D&O cover is purchased, the most common reason given by 32%
of respondents is that it is required by law in the local territory. A further 26%
say that it is demanded by local directors and a further 20% indicate that it is purchased to cover local coverage needs. 40% of organisations reported that they do not allow local purchase by subsidiaries. One risk manager described their approach as: “we have a master policy placed out of the UK with local policies that are connected to the master issued in all countries were local paper is required”.
Figure 4:
Geographical structure of the D&O program
Reason for buying local policy Percentage
Required by local laws 35
Demanded by local directors 28
Local coverage needs 22
Advised by brokers 11
Cost effective option 4
There were interesting responses to the question whether subsidiaries are allowed to buy their own D&O policy. 20% said that when local cover is required, it can only be purchased by head office. A further 30% said that it can be purchased locally, but only when approved by head office. A minority of companies allow local subsidiaries to purchase their own D&O cover independently of head office. One risk manager explained that local cover is purchased to be certain that the “means to provide funds for defence cost to directors in non-admitted territories” are available.
Information on the structure of D&O policies was also obtained during the survey. It was found that only one in eight policies have a primary insurer only with a further one in eight structured with the primary insurer and one excess layer. However, 40% of insurance programs for D&O have five or more insurers or layers involved in the insurance structure.
The variation in the structure of insurance programs was also demonstrated by the limits of indemnity that are purchased. Use of a primary layer only tended to be restricted to companies that purchase less than £25 million limit of indemnity.
For companies purchasing between £25 million and £50 million, between two and six insurers are involved in the program. All companies purchasing more than £50 million worth of cover have more than six layers involved in the structure of the insurance program.
Table 1:
Main reason for buying local D&O policy
4. Risk manager role and responsibilities
Questions were asked in the survey about the role and responsibilities of the risk manager within the insurance purchasing function. In more than 75% of cases, the Airmic member has broad responsibilities, including disclosing material facts and reporting material changes to insurers, designing the insurance program and buying the appropriate insurance cover.
The other main areas of responsibility for Airmic members was setting the D&O guidelines and procedures and providing the board of directors with details of the risks and insurance cover. Nearly 50% of Airmic members were also involved in assessing the exposure of the company to D&O risks and assessing the exposure of directors to risks, although these responsibilities tended to be shared with others.
Activity Responsible Routine
input
Occasional input
Not involved Setting the D&O
policy, guidelines, and procedures
53 24 16 8
Assessing company exposure to D&O risk events
48 30 18 3
Assessing director and officer exposure to D&O risk events
47 30 19 3
Designing and recommending appropriate insurance program
74 17 8 0
Buying the
appropriate insurance program
82 12 2 4
Providing directors with a summary of risks and insurance
67 26 6 0
Education and training of directors regarding D&O exposures
27 25 31 13
Monitoring impact of regulatory changes on risk exposures
39 35 19 6
Other activities of Airmic members are shown in Table 2. It is in relation to education and training for directors and the monitoring of the impact of regulatory changes that Airmic members tend to share responsibilities, often with the legal department. It was in relation to education and training of directors regarding D&O exposures where the greatest number of Airmic members had no involvement.
Table 2:
Involvement of risk managers in D&O activities
5. Presentation of underwriting information
Risk managers have significant involvement in the collection of D&O exposure information. 52% of respondents reported that they have responsibility for making enquiries across the organisation in order to complete the D&O proposal form. However, 32% reported that the enquiries related to the collection of information held at head office only.
The responsibility of the risk manager for collecting D&O information was a feature of all sizes of organisations and this activity is clearly a primary role of Airmic members. The collection of D&O underwriting information by brokers as part of their client servicing was reported by only 5% of the organisations.
Based on these results, it is clear that Airmic members are more likely to collect D&O underwriting information themselves than to depend on the services of the insurance broker.
Although a specific question was not asked in the survey, the closer involvement in the collection of D&O underwriting information may be related to the
confidential nature of this information and/or the greater concerns related to D&O insurance by directors of the company.
Style of presentation Percentage
Proposal form representing the whole company 63
Supply of annual report and accounts 58
Proposal form representing head office only 25 Formal presentation at a meeting attended by underwriters 25
Separate narrative report to underwriters 18
Questions were also asked about how the information is presented to underwriters and the results are shown in Table 3. For 63% of organisations a proposal form is completed covering the whole organisation and this is supplied to underwriters together with a copy of the company annual report and accounts in almost all such cases.
It was only in 25% of cases that a formal presentation was made to underwriters at a meeting attended by the insured. An even smaller number (18%) provided underwriters with an additional narrative report. Nevertheless, there were examples where the risk manager reported that “written response in letter format to specific questions raised by underwriters” was provided.
There was no significant variation in the means by which information was presented to underwriters dependent on the size of the organisation. It is, perhaps, surprising that larger organisations do not have a greater tendency to make a formal presentation to underwriters in order to discuss the D&O insurance program. Although one risk manager reported that the information was
“supplemented with face-to-face meeting with insurers and occasional market presentations”.
In terms of the information retained by risk managers, 86% of Airmic members reported that they kept a signed and dated copy of the proposal form, with 50% reporting that they kept records of sources, time, date and content of each item contained used to compile the proposal form. It was only in 31% of cases that minutes of meetings were kept to provide an audit trail of the information disclosed to underwriters.
Table 3:
Presentation of underwriting information
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Benchmarking Report: Directors’ & Officers’ Liability (D&O) Insurance
6. Structure of D&O insurance programs
As part of the survey, Airmic members were asked about the scope of the D&O insurance purchased. Only 6% of Airmic members reported that they purchase Side A (director non-indemnifiable exposures) cover only.
About 50% purchase Side A and Side B (director indemnifiable or company reimbursement) cover. The remaining 40% of companies that purchase D&O cover buy Side A, Side B and Side C (entity cover or liability cover for shareholder actions) insurance. One risk manager described the program in place as: “conventional Side A, Side B and Side C cover with Side A drop- down”.
In relation to Side A cover, 47% of companies have a ‘Deed of Indemnity’ in place to provide directors the maximum indemnity allowed by law. A further 25%
are developing a suitable deed of indemnity, although 25% reported that they do not have a deed of indemnity in place and are not looking to produce such a document at the moment. One risk manager reported that the deed of indemnity was “developed by the external legal adviser for main board directors only”.
40% Side A, Side B and Side C (entity cover or liability
cover for shareholder actions)
5% Not applicable 6% Side A only
(director non-indemnifiable exposures)
49% Side A and Side B (director indemnifiable or company re-imbursement)
It is not unusual to have a deductible applied to Side B, but 30% of companies responding to the survey reported that they have a zero deductible in place.
Figure 6 shows the range of deductibles in place for Side B cover and it can be seen that a further 44% of companies have a deductible less than £250,000.
This means that approximately 75% of companies have a deductible of less than
£250,000.
6% Do not buy Side B cover 4% More than £5 million 6% £1 million to £5 million 10% £250k to £1million 15% £50k to £250k 12% £20k to £50k 8% £10k to £20k 9% Less than £10k 30% Nil
Figure 5:
Types of D&O cover purchased
Figure 6:
Deductibles applied to Side B cover
There is often discussion about whether a captive insurance company should be involved in the D&O insurance program. The question was asked whether the captive is involved in the D&O insurance program and almost all respondents indicated that this was not the case. One risk manager commented that it was
“decided that it is inappropriate for the captive to write D&O”. However, others reported that the captive “writes the primary layer” and the captive acts as “co- insurer on the primary layer”.
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Benchmarking Report: Directors’ & Officers’ Liability (D&O) Insurance
7. D&O limits and premium
Questions were asked in the survey about the limit of indemnity purchased by companies. 25% of companies purchase £25 million or less and 20% of companies purchase between £26 million and £50 million. A further 40%
of companies purchase between £51 million and £250 million. Very few companies purchase more than £1 billion of cover for their directors’ and officers’ liability insurance.
The survey asked about the legal status of the company and the limit of indemnity purchased to seek to identify a relationship between these factors.
It was found that public limited companies purchase an average £200 million of indemnity with companies that have a US listing tending to purchase about 10% limit more than those with their main listing in the UK. For public limited companies with the main listing in Europe, an average of £80 million limit of indemnity was purchased.
Ownership status Typical Limit of
Indemnity Public Limited company with main listing in the US £200 million Public Limited company with main listing in the UK £190 million Public Limited company with main listing in Europe £80 million
Company limited by guarantee £60 million
Privately owned / non-listed company £50 million Public sector or charity organisation £40 million
Companies limited by guarantee, those that are privately owned and organisations that are in the public sector, charity or non-governmental tend to purchase around £50 million or less limit of indemnity. This information is summarised in Table 4. Figure 7 shows the range of limits of indemnity purchased by companies in different sectors. Financial institutions and leisure, hotel and travel purchase the highest limits.
There was insufficient information in the survey to undertake a full analysis of the relationship between industry sector and the limit of indemnity purchased.
Nevertheless, certain coverage trends could be identified. For financial institutions and companies in the leisure, hotel and travel sector, a limit of indemnity approaching £300 million was the average figure, as shown in Figure 7. Other sectors purchasing in excess of £100 million limit were natural resources and mining, industrial and manufacturing, legal and business support and media, IT and telecoms.
Table 4:
Relationship between ownership status and D&O limit of indemnity
0 50 100 150 200 250 300 Charity, NHS or local authority
Food, drink and tobacco Construction and civil engineering Property, housing and real estate Retail and distribution Transport Aerospace and Defence Power, water and utilities Media, IT and telecoms Legal and business support Industrial and manufacturing Natural resources and mining Leisure, hotel and travel Financial institutions
Limit of indemnity (millions)
Analysis was also undertaking to seek a relationship between the premium being paid and the limit of indemnity purchased. Financial institutions purchase the highest limit of indemnity and are paying the high highest average D&O premium with an average premium in excess of £7 million.
It was noted that, although legal and business support services do not tend to purchase the highest limits of indemnity, the average premium spend was nearly
£5 million, whereas almost all other sectors were paying a premium of about £1 million and, in many cases, much less. Legal and business support purchase an average limit of £130 million, but this sector has the second highest premium after financial institutions. This indicates that financial institutions and the legal and business support sectors are paying the highest premium rates.
Figure 7:
Relationship between industry sector and D&O limit of indemnity
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Airmic Technical
The survey asked about how D&O information is communicated around the organisation and Table 5 provides a summary of the results. It was reported that 95% of boards receive information on D&O insurance with 56% also providing information to the executive committee. In 18% of cases, the information is not communicated beyond those with insurance responsibilities.
It was also reported that information is provided to group legal department in 48% of cases, with information being passed to the audit committee and to business unit divisional management in 24% of cases. It is, therefore, the case that D&O insurance information is passed to board members in the vast majority of organisations.
Notification to the following Percentage
Board, including non-executive directors 95
Executive committee 56
Group legal or external legal advisers 48
Audit committee 26
Business unit divisional management 24
Local insurance correspondents 18
Finance committee 16
All employees having a management role 8
The fact that 95% of companies communicate information to the board indicates that this is the class of insurance of greatest interest to board members. It is worth noting that audit committee and the business unit divisional management are advised of the terms and conditions of the D&O insurance policy in about a quarter of the companies responding to the survey. Less than 10% of companies communicate details of D&O insurance policy to all employees having a
management role.
Table 5:
Relationship between ownership status and D&O limit of indemnity
8. Communication of D&O information
A question was also asked about claims handling arrangements. The answer to this question is summarised in Table 6. Established claims procedures were in place in 55% of companies and procedures were in place with brokers and/or insurers to notify a claim or circumstance. It was noted that legal department or a legal adviser will take control of the claim in the majority (55%) of cases. However, 49% of risk managers reported that there was an informal expectation by the risk manager that they would take control, in the event of a claim or circumstance being notified.
Feature of claims preparation or notification Risk Manager involved Yes No Don’t Know Defined roles and responsibilities in case of a
potential claim
28 37 35
Prepared a claim / circumstance notification procedure
30 39 30
Managers / employees briefed on actions in case of a potential claim
31 40 28
Claims notification procedures established with brokers and/or insurers
55 24 21
Reporting of claims handled by legal team / legal advisers
33 39 28
Legal department / adviser will take control of a claim
55 18 27
Informal expectation that risk manager will take control
49 31 19
Routine confirmation that claim / circumstances have not arisen
34 20 24
It appears from the survey results that claims handling arrangements are not clearly established in all cases. The survey asked about different aspects of responding to a potential claim and in about a quarter of all cases, the risk manager completing the survey indicated that they did not know what would happen. Many risk managers feel uncertain about how the D&O policy would respond in the event of a claim and this was summarised by one risk manager in very broad terms as: “The D&O insurance product is ill-adapted to real-life situations”.
The different aspects of responding to a potential claim included questions about who would take control, whether defined roles and responsibilities had been established and communicated. It was reported by about 40% of respondents that managers and employees have not been briefed on how to respond to a potential claim. However, in 34% of circumstances, risk managers undertook a routine investigation within the company to confirm that a claim or circumstance in relation to D&O had not arisen. This is likely to be undertaken at the time D&O underwriting information is collected for renewal, although this could also be part of an annual control risk self-assessment exercise.
Table 6:
Preparation for a potential D&O claim
9. Claims handling arrangements
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Airmic Technical
Perhaps this uncertainty is related to the fact that claims do not arise very often in relation to D&O insurance. Also, this is a category of insurance where directors are most concerned and where legal department or external legal advisers, as well as the company secretary, are likely to be involved.
In response to a question about the difficulties associated with D&O claims, some of the anticipated difficulties included “refusal of insurer to indemnify because of alleged non-disclosure” and “claims arising in non-admitted countries where we have opted not to arrange a local policy”. One risk manager identified particular difficulties associated with “new board versus old broad types of conflicts“. In certain wordings, this type of claim may be the subject to an ‘insured verses insured’ exclusion in the policy.
In constructing a D&O insurance program, it is important for risk managers to engage with existing governance processes in their company to ensure involvement by the appropriate people and committees. The benefit of robust governance processes is that the D&O policy will operate as intended when a claim arises.
Members were also asked how assurance was obtained that the D&O insurance policy was appropriate and fit for purpose and the results are shown in Table 7.
85% of respondents indicated that the broker review of wordings, definitions and exclusions were the main sources of assurance. 65% reported that the broker also provided assurance that the policy provided the best cover available.
Assurance or governance activity Percentage
Broker review of wordings, definitions and exclusions 85 Broker assurance that policy provides best available cover 65 Risk Management department review of wording, definitions
and exclusions
61
Legal review of policy wording by legal team / legal advisers 27 Review of policy wording by independent insurance advisor 21 Assurance from primary insurer that policy provides best
available cover
11
No formal arrangement for providing assurance 2
In 61% of cases, the risk management department itself undertook a review of wordings, definitions and exclusions and this was seen as the main source of assurance. It was only in 27% of cases that the policy wording was reviewed by the legal experts, although a further 21% said that a review of policy wording by an independent insurance adviser had been undertaken. This was described by risk managers responding to the survey as “legal review of policy wording by legal team and legal advisers” and “review of policy wording by independent insurance adviser”.
Another source of assurance that the policy provided the best cover available was from the primary insurer, although this was accepted as the main source of coverage assurance in 11% of cases. It was only in 2% of cases that no formal arrangements were in place for providing assurance.
Finally, a question was asked about the level of concern of the different stakeholders in D&O insurance program. The survey indicated that the level of concern was greatest amongst main board directors, including non-executive directors, with 40% of respondents indicating that directors were the most concerned. The next level of concern included in the CFO, company secretary, CEO and the risk manager, with in excess of 25% of respondents indicating that these categories were the most concerned.
Table 7:
Governance of D&O policy efficacy
10. D&O policy assurance
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Airmic Technical
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