UK Directors' and Officers' Insurance 2009

Published by: Datamonitor

Published: Nov. 11, 2009

Table of Contents

Overview

Catalyst

Summary

Executive Summary

The total UK directors' and officers' insurance market grew by 5.2% to £468m in 2008

Stabilizing rates in some lines and greater product penetration led to higher levels of GWP

Directors' and officers' insurance distribution is dominated by brokers

The strong level of expertise that brokers have make them the primary route to market

There has been a small growth in online delivery for brokers from insurers over the past few years

AIG, ACE and Chubb remain the top three UK directors' and officers' insurance carriers

Despite its exposure to the sub-prime crisis, AIG UK still remains in healthy shape

ACE has grown its market share due to growth in new business

Chubb also managed to increase its market share, rising to 19% of the market

The UK directors' and officers' insurance market is forecast to grow to £596m by 2013

Rate increases and increased penetration of SMEs will lead to GWP growth

Table of Contents

Table of figures

Table of tables

Market Context

Introduction

The total UK directors' and officers' insurance market grew by 5.2% to £468m in 2008

Stabilizing rates in some lines and greater product penetration led to higher levels of GWP

The rate of decline of D&O premium rates has been falling recently in line with greater claims risk

Unsurprisingly, financial institutions are seeing the largest rate increases in the UK

FTSE100 Chemical, natural resources and pharmaceutical companies pay the highest average premium

Demand for D&O is robust despite the difficult financial climate

FTSE 100 companies are buying 20% more D&O cover than they were 12 months ago

Insurers are competing heavily for new business within the smaller end of the market

In line with greater SME uptake, more brokers are expected to introduce D&O to their product range

The D&O market remained profitable in 2008 although much less so than previous years

Profit margins will be squeezed due to broad coverage and low rates, which has left many exposed

Perversely, the anticipation of a hardening market has further depressed rates, squeezing margins

In Europe, a number of major reinsurers are withdrawing liability treaties, resulting in higher reinsurance costs and lower margins

Claims are likely to rise due to the recession, with insolvencies and employment-related claims major drivers

D&O claims have not seen any significant growth in the UK as of yet, although the future is uncertain

Claims notifications are on the rise, but these may not necessarily lead to a greater number of claims

Ballooning insolvencies are expected to increase claims by disgruntled workers and stakeholders

The recession has put pressure on SMEs and is resulting in more insolvencies

The majority of D&O claims are associated with employment issues

Data from the Tribunals Service shows a significant rise in dismissal- and redundancy-related claims

Several issues may cause a further increase in directors' and officers' insurance claims

Litigation funding companies may contribute towards greater claims activity

Disputes regarding the exhaustion limits triggering excess layers may become more common

The Health and Safety (Offences) Act will increase the penalties for those that break health and safety law

Different trends are in evidence in the US and UK directors' and officers' insurance markets

D&O premium rates in the UK are diverging compared with the US

In the US, financial institutions paid the highest average D&O premiums in 2008

The US has experienced a flood of class action filings, which may also affect the UK market

Typically, there is a lag between the notification of a class action and settlement

While similar, the US and the UK are not directly comparable when comparing class action lawsuits

Distribution Dynamics

Introduction

Large national brokers continue to distribute the vast majority of commercial insurance

Independent insurance intermediaries of all types retained their majority market share in 2008

Direct players account for a small but growing portion of the commercial general insurance market

Some D&O insurers are looking at going direct, while others are delegating more authority to brokers

Corporate partnerships have maintained only a small presence in the commercial insurance market

Banks and building societies distribute negligible amounts of commercial general insurance

Directors' and officers' insurance distribution is dominated by brokers

The strong level of expertise that brokers have make them the primary route to market

There has been a small growth in online delivery for brokers from insurers over the past few years

Commercial liability products are likely to remain brokered for the foreseeable future

The vast majority of SMEs use brokers for commercial insurance policies

Brokers dominate among all sizes of SMEs, though they have greater market share among larger SMEs

Face-to-face arrangement is popular in the market but is more prevalent among larger SMEs

SMEs simply prefer to use the face-to-face channel as it helps simplify the problem

Of those SMEs willing to buy insurance online or via the telephone, D&O was the least popular

Package products are the principle means through which SMEs purchase their cover

D&O SME penetration is one of the lowest compared with other commercial lines

Approximately a quarter of SMEs surveyed buy directors' and officers' liability, suggesting there is further growth potential

Only 15% of micro sized firms purchase directors' and officers' cover

There is now a strong emphasis on assessing the right carrier for a D&O policy

The current economic climate is prompting buyers of D&O insurance to assess their insurers solvency

Insurer's financial stability is the number one concern for both brokers and clients alike

Insurers need to know everything about their buyers

Standalone, higher limit directors' and officers' cover is becoming more popular among buyers

Non-price aspects of D&O contracts need extra attention for buyers, especially for smaller businesses

Competitive Dynamics

Introduction

AIG, ACE and Chubb remain the top three UK directors' and officers' insurance carriers

Despite its exposure to the sub-prime crisis, AIG UK still remains in healthy shape

ACE has grown its market share to 21% due to growth in new business

Chubb also managed to increase its market share, rising to 19% of the market

The remainder of the market is characterized by smaller and often excess insurers

Zurich recently extended its D&O cover for derivative claims

Allianz has an estimated 7.5% share of the D&O market

QBE had a 5% share of the market in 2008

The amount of D&O GWP written by the Lloyd's of London market declined slightly in 2008

The proportion of D&O business written by the Lloyd's market decreased

The majority of D&O cover written in the Lloyd's market is for financial institutions

Due to its syndicated nature of underwriting, the Lloyd's market is becoming increasingly favorable

Future Decoded

Introduction

The UK directors' and officers' insurance market is forecast to grow to £596m by 2013

Rate increases and increased penetration of SMEs will lead to GWP growth

The UK directors' and officers' insurance market will peak in terms of growth rate in 2010

APPENDIX

Definitions

Employers' liability

Professional indemnity

Directors' and officers' liability

A-side coverage

B-side coverage (corporate reimbursement)

C-side coverage (entity securities coverage)

Attritional losses

Employment Practices Liability

Earned premiums

Gross premiums

GWP

London insurance market

Micro, small and medium sized enterprises (SME)

Written premiums

Methodology

Primary and secondary research

Exchange rate conversions

Data on the Lloyd's market

Datamonitor's SME Insurance Survey Q2 2009

Datamonitor's commercial broker survey

Competitor estimates

Further reading

Ask the analyst

Datamonitor consulting

Disclaimer

Overview

Table 1: Total UK directors' and officers' GWP and growth rate, 2003e-08e

Table 2: Quarterly movement in premium rates, Q2 2005-Q2 2009 (%)

Table 3: UK company insolvencies, 2004-2009

Table 4: Dismissal and redundancy related employment tribunals, 2005-08

Table 5: Annual number of US class action filings, 2003-08

Table 6: Status of US securities class action cases by year filed, 2003-08 (%)

Table 7: Market share of distribution channels in the commercial general insurance market, 2004-08 (%)

Table 8: Estimated market shares of leading UK D&O insurers, 2006-08 (%)

Table 9: Lloyd's premium income and share of the total UK directors' and officers' market, 2004-08

Table 10: Proportion of financial institutions and non-financial institutions offering directors' and officers' cover written in the Lloyd's market (%), 2004-08p

Table 11: Key drivers affecting UK directors' and officers' insurance GWP, 2009f-13f

Table 12: UK directors' and officers' GWP, 2003e-13f (£m)

Table 13: Q: "What business sector are you involved in?"

Table 14: Q: "How large is your company in terms of number of employees?"

Table 15: Q: "How large is your company in terms of turnover?"

Table 16: What proportion of your business is commercial insurance compared to personal insurance (in terms of premium income)?

List of Figures

Figure 1: UK D&O premium income was estimated to have grown for the first time since 2005

Figure 2: UK D&O premium income was estimated to have grown for the first time since 2005

Figure 3: Over the last year, the rate of decline of D&O premium rates has decelerated

Figure 4: Surprisingly, the total number of insolvencies dropped slightly in Q2 2009, although they are still considerably higher on a year-for-year basis

Figure 5: Dismissal- and redundancy-related employment tribunals have increased over the past 12 months

Figure 6: Compared with 2007, 2008 saw a 27% increase in the number of US class action filings

Figure 7: In 2008, no class actions were settled in the same year, indicating the market's medium-tail nature

Figure 8: Brokers still remain the dominant route to the market for UK commercial insurers

Figure 9: Unlike commercial motor, the liability line is expected to see minimal business go direct

Figure 10: Brokers have the highest penetration among medium-sized firms

Figure 11: Micro SMEs are most comfortable with arranging their cover over the telephone

Figure 12: There are a variety of reasons why SMEs do not use the telephone and internet channels

Figure 13: The majority of SMEs would prefer not to buy D&O cover over the telephone or internet

Figure 14: Most SMEs will purchase their insurance in the form of a package

Figure 15: Only a quarter of SMEs buy directors' and officers' insurance

Figure 16: D&O penetration is very low among micro and small sized firms

Figure 17: ACE and Chubb managed to gain market share in 2008

Figure 18: Lloyd's insurers wrote £29.5m of D&O premiums in 2008, 5.4% less than in 2007

Figure 19: The total UK D&O market will peak in terms of growth rate in 2010 and grow to £595.8m by 2013

Abstract

Introduction

This report provides a detailed analysis of the current trends and issues in the UK directors' and officers' market. More specifically, it examines the size of the market, demand, profitability, claims, distribution and who the main players are within the market. Finally, it presents Datamonitor's forecast of total directors' and officers gross written premiums up to 2013.

Scope

• Estimates of the size and growth of the UK directors' and officers market.
• A discussion of what the key trends are affecting profitability.
• An insight into SME purchasing patterns.
• Information on the main competitors active in the UK directors' and officers' market.

Highlights

The total UK directors' and officers' insurance (D&O) market is estimated to have grown from £445m in 2007 to £468m in 2008, as measured by gross written premiums (GWP).

Despite the increasingly risky nature of writing directors' and officers' insurance during the current climate, most insurers are still making profits from their D&O portfolio, and this will remain the case for the foreseeable future. In 2008, there were no large commercial (non-financial) losses within the UK market.

D&O distribution is almost entirely confined to the large national and regional brokers that are able to facilitate the large administration costs required to place a D&O policy.

Reasons to Purchase

• Gain an understanding of the key factors affecting the market and the current state of the competitive landscape.
• Develop your knowledge of the key purchasing patterns of SMEs in order to target exactly what clients need during the economic downturn.
• Adjust your ambitions within this market by using Datamonitor's forecast for total market growth up to 2013.

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