Directors & Officers Liability Survey2000 Results and Historical Trends

Casualty Actuaries of Greater New York

November 28, 2001

Lisa Gattel Chanzit, FCAS, MAAA, ARM

2

Directors & Officers Liability SurveyBackground

Formerly conducted by Watson Wyatt.Conducted by Tillinghast as of 1998 Survey.

Self-selecting nonprobability sample of claim and insurance purchasing patterns.

Responses submitted primarily in second half of calendar year.

Not every participant answers every question, even though there is substantial follow-up.

Over 2,050 usable responses in 2000 Survey, including Canadian responses.

3

Directors & Officers Liability SurveyChanges for 2000

Other nonprofits reintroduced, after Health Services in 1998 and Education in 1999.

Biotechnology & Pharmaceuticals industry group.

More high technology firms (again).

More small firms (again).

More detailed analysis of coverage features and claims experience.

4

Directors & Officers Liability SurveyParticipation by Business Class

0% 10% 20% 30% 40%

Goverment & Other Nonprofit

Education

Health Services

Personal & Business Services

Construction & Real Estate

Non-Bank Financial Services

Banking

Merchandising

Utilities

Transportation & Communications

Nondurable Goods Manufacturing

Biotechnology & Pharmaceuticals

Durable Goods Manufacturing

Technology

Petroleum, Mining & Agricultural

1998 1999 2000

5

Directors & Officers Liability SurveyClaim Topics

Claim Frequency

Claimants

Claim Severity

Indemnification

Insurance Coverage

Disclosure Claims and other Shareholder Claims

6

Directors & Officers Liability SurveyClaim Frequency by Business Class

0 50 100 150 200

Government & Other Nonprofi t

Education

Health Services

Personal & Business Services

Construction & Real Estate

Non-Bank Financial Services

Banking

Merchandising

Utilities

Transportation & Communications

Manufacturing

Biotechnology & Pharmaceuticals

Technology

Petroleum, Mining & Agricultural

Frequency per Participant (%)

1998 1999 2000

7

Directors & Officers Liability SurveyClaim Frequency by Asset Size - For-Profit

0

100

200

300

400

500

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Survey Year

Fre

qu

en

cy p

er

Part

icip

an

t (%

)

Under $100 Mil $100 Mil to $1 Bil $1 Bil to $10 Bil Over $10 Bil

8

Directors & Officers Liability SurveyClaim Frequency by Ownership

0

20

40

60

80

100

120

1984 1986 1988 1990 1992 1994 1996 1998 2000

Survey Year

Fre

qu

en

cy p

er

Part

icip

an

t (%

)

Private Public

9

Directors & Officers Liability SurveyClaim Frequency by Merger/Acq./Div. - For-Profit

0

20

40

60

80

100

120

1988 1990 1992 1994 1996 1998 2000

Survey Year

Fre

qu

en

cy p

er

Part

icip

an

t (%

)

No Recent M/A/D Recent M/A/D

10

Directors & Officers Liability SurveyClaim Frequency by After-Tax Losses - For-Profit

0

20

40

60

80

100

120

1988 1990 1992 1994 1996 1998 2000

Survey Year

Fre

qu

en

cy p

er

Part

icip

an

t (%

)

No Recent Losses Recent After-Tax Losses

11

Directors & Officers Liability SurveyClaimant Distribution - For-Profit

0%

20%

40%

60%

80%

100%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

*

1998

1999

2000

Survey Year

Shareholders Employees Customers Other

* Adjusted

12

Directors & Officers Liability SurveyClaimant Distribution

0% 20% 40% 60% 80% 100%

Other Third Party

Government

Shareholders

Competitors /Contractors

Customers / Clients

Employees

Nonprofit Private PublicSource: 2000 D&O Liability Survey

13

Directors & Officers Liability Survey Average Severity for Closed Claims - For-Profit

0

1

2

3

4

5

6

7

8

9

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

Defense Indemnity "Total"

Note: Excludes claims closed w/o payment.

14

Directors & Officers Liability Survey Average Indemnity Severity by Business Class

0

2

4

6

8

10

12

14

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

Tech/Biotech Utilities Merchandising Manufacturing Banking

Note: Excludes claims closed w/o payment.

15

Directors & Officers Liability Survey Average Defense Severity by Business Class

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

Tech/Biotech Utilities Merchandising Manufacturing Banking

Note: Excludes claims closed w/o payment.

16

Directors & Officers Liability Survey Average Indemnity Severity by Asset Size

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

$100 Mil to $1 Bil Over $1 Bil

Note: For-profit only. Excludes claims closed w/o payment.

17

Directors & Officers Liability Survey Average Defense Severity by Asset Size

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

$100 Mil to $1 Bil Over $1 Bil

Note: For-profit only. Excludes claims closed w/o payment.

18

Directors & Officers Liability Survey Average Indemnity Severity by Claimant

0

2

4

6

8

10

12

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

Shareholders Employees Competitors Customers

Note: Excludes claims closed w/o payment

19

Directors & Officers Liability Survey Average Defense Severity by Claimant

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000

Survey Year

Mil

lio

ns o

f U

S D

oll

ars

Shareholders Employees Competitors Customers

Note: Excludes claims closed w/o payment

20

Directors & Officers Liability Survey Indemnification by Firm for D&O Claims

No Indemnification

4%

Partial Indemnification

7%

Undecided19%

Full Indemnification

70%

Source: 2000 D&O Liability Survey Note: Excludes claims where the entity is the only defendant

21

Directors & Officers Liability SurveyInsurance Coverage of D&O Claims - Closed

0% 20% 40% 60%

Claim Amount LessThan Deductible

Claim OutsidePolicy

No Insurance

Partial Coverage

Full Coverage

1998 1999 2000Note: Excludes uncertain responses

22

Directors & Officers Liability Survey Disclosure Claim Incidence

0%

5%

10%

15%

20%

25%

30%

35%

40%

1988 1990 1992 1994 1996 1998 2000

Survey Year

Disclosure Claim Incidence among Shareholder Claims

23

Directors & Officers Liability Survey Shareholder Claim “Win” Ratios

Number ofClaims Closed

Number withNo Indemnity*

“Win”Ratio

Claims w/ Disclosure Issue 42 16 38%

Claims w/o Disclosure Issue 86 51 59%

All Shareholder Claims 128 67 52%

* Note that substantial legal costs may have been incurred.

Source: 2000 D&O Liability Survey

24

Directors & Officers Liability SurveyPrevalence by Business Class

0% 20% 40% 60% 80% 100%

Government & Other Nonprofi t

Education

Health Services

Personal & Business Services

Construction & Real Estate

Non-Bank Financial Services

Banking

Merchandising

Utilities

Transportation & Communications

Manufacturing

Biotechnology & Pharmaceuticals

Technology

Petroleum, Mining & Agricultural

1998 1999 2000

25

Directors & Officers Liability SurveyPrevalence by Asset Size - For-Profit

80% 85% 90% 95% 100%

Under $50 Million

$50 - 100 Million

$100 - 400 Million

$400 MM - 1 Billion

$1 - 2 Billion

$2 - 5 Billion

$5 - 10 Billion

Over $10 Billion

1998 1999 2000

26

Directors & Officers Liability SurveyPrevalence by Full-Time Employees

0% 20% 40% 60% 80% 100%

Under 250

251 - 1,000

1,001 - 2,500

2,501 - 5,000

5,001 - 10,000

Over 10,000

1998 1999 2000

27

Directors & Officers Liability SurveyPrevalence by Ownership - For-Profit

50%

60%

70%

80%

90%

100%

1984 1986 1988 1990 1992 1994 1996 1998 2000

Pre

vale

nce

Private Public All

28

Directors & Officers Liability SurveyEntity Coverage Prevalence by Asset Size

0% 20% 40% 60% 80% 100%

Under $400 Mil

$400 Mil - $1 Bil

$1 - $2 Bil

$2 - $5 Bil

Over $5 Bil

1998 1999 2000

29

Directors & Officers Liability SurveyMain Reason for Not Purchasing D&O Insurance

0% 20% 40% 60%

Other

Unable to Obtain

Cost Too High

Coverage TooLimited

See No Need for It

Advice of Counsel

1998 1999 2000

30

Directors & Officers Liability SurveyD&O Premium Index - U.S., For-Profit Only

0

100

200

300

400

500

600

700

800

900

1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Median Average

31

Directors & Officers Liability SurveyFull D&O Limits Capacity (Millions)

0

400

800

1200

1600

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

32

Directors & Officers Liability SurveyAverage Total Limit by Asset Size - For-Profit

0

20

40

60

80

1984 1986 1988 1990 1992 1994 1996 1998 2000

Lim

it (

$m

illi

on

)

Under 100 Mil $100 - $400 Mil $400 Mil - $1 Bil$1 - $2 Bil Over $2 Bil

33

Directors & Officers Liability SurveyAverage Deductible by Asset Size - For-Profit

0

1

2

3

4

1984 1986 1988 1990 1992 1994 1996 1998 2000

Ded

ucti

ble

($

mil

lio

n)

Under $400 Mil $400 Mil - $1 Bil $1 - $2 Bil $2 - $5 Bil Over $5 Bil