Corporate Governance & Directors' Duties

• Governance Indices Are A Poor Predictor Of Performance

• Bulwark Against Increased Shareholder Activism: More Transparency

• How (And Why) Boards At Private And Public Firms Differ

• D&O Premiums Soar For Financial Services Firms

Global Markets

• China's Securities Regulation Does Not Need Private Actions

Securities Regulation & Disclosure

• Changes In Risk Management Must Be Assessed And Disclosed

• Outline For Preparing Annual Disclosures

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Feeling the pain. Are D&O premiums about to skyrocket? The answer apparently depends on the insured's industry. Some companies are likely to see substantial increases in the premiums and deductibles for directors' and officers' insurance, while others will barely notice any difference from previous years, reports Russ Banham. Financial services firms, especially those with the highest litigation risk, can expect D&O premiums to rise, financial limits to contract, and policy terms and restrictions to tighten. As investment banks' share prices continue to nosedive, some financial services firms have also faced an unprecedented wave of lawsuits from disgruntled investors. Of 210 federal class actions filed in 2008, for example, nearly half involved financial services firms, and nearly one-third of all the large firms in the sector were named as defendants. Given the number of lawsuits and the potential for huge awards, insurers are nervous about D&O coverage (as well as errors and omissions coverage or fiduciary liability policies).

Skyrocketing costs. Companies outside the financial services sector encounter a cheerier picture: they report level or just slightly higher premiums for D&O insurance in 2009. The largest lawsuits are slowly being cleared from the dockets, and most property/casualty insurers are in solid shape, thanks to a string of several profitable years. That news, however, provides little solace to financial services firms bearing the burden of rising-but-inescapable insurance costs. Without D&O coverage, the author reminds, their directors and officers could be held personally liable for legal and settlement costs in a lawsuit, which can be astronomical. A risk manager at one major regional bank reports paying $17 million for D&O, E&O, and other professional liability policies that also carry deductibles of $25 million to $50 million. Another risk manager at a major global financial services firm with a higher risk profile cites a 90% premium increase in his company's primary layer of D&O insurance. The cost of the insurance comes to approximately 18% of the amount covered, and the risk manager expects that figure to increase to 40%.

Lowering the tab. Despite the anecdotal evidence, the author indicates that companies with lower risk profiles, including those in the financial services industry, can take steps to lower or flatten their premiums and to minimize risk. For example, with limits in the hundreds of millions of dollars, it makes sense to spread coverage among several insurance companies and reduce reliance on a single insurer. Dropping any insurer that has been downgraded by the rating agencies in the prior 12 months may also be advisable, particularly when it comes to the all-important D&O coverage. To keep premiums reasonable, the insured should be prepared to present liquidity, debt, and balance-sheet information to demonstrate its soundness. The top financial executives should attend during the renewal process; this can reassure the underwriters that the company is well-managed and has implemented measures to control liability.

Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston MA 02210. To subscribe, call (800) 877-5416; or visit www.cfo.com.