UK Directors' and Officers' Insurance 2009

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.


Report Highlights

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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The total UK directors' and officers' insurance market grew by 5.2% to £468m in 2008 2
Stabilizing rates in some lines and greater product penetration led to higher levels of GWP 2
Directors' and officers' insurance distribution is dominated by brokers 3
The strong level of expertise that brokers have make them the primary route to market 3
There has been a small growth in online delivery for brokers from insurers over the past few years 3
AIG, ACE and Chubb remain the top three UK directors' and officers' insurance carriers 4
Despite its exposure to the sub-prime crisis, AIG UK still remains in healthy shape 4
ACE has grown its market share due to growth in new business 4
Chubb also managed to increase its market share, rising to 19% of the market 4
The UK directors' and officers' insurance market is forecast to grow to £596m by 2013 4
Rate increases and increased penetration of SMEs will lead to GWP growth 4
Table of Contents 6
Table of figures 7
Table of tables 8
Market Context 9
Introduction 9
The total UK directors' and officers' insurance market grew by 5.2% to £468m in 2008 9
Stabilizing rates in some lines and greater product penetration led to higher levels of GWP 9
The rate of decline of D&O premium rates has been falling recently in line with greater claims risk 11
Unsurprisingly, financial institutions are seeing the largest rate increases in the UK 13
FTSE100 Chemical, natural resources and pharmaceutical companies pay the highest average premium 14
Demand for D&O is robust despite the difficult financial climate 14
FTSE 100 companies are buying 20% more D&O cover than they were 12 months ago 14
Insurers are competing heavily for new business within the smaller end of the market 15
In line with greater SME uptake, more brokers are expected to introduce D&O to their product range 15
The D&O market remained profitable in 2008 although much less so than previous years 16
Profit margins will be squeezed due to broad coverage and low rates, which has left many exposed 16
Perversely, the anticipation of a hardening market has further depressed rates, squeezing margins 16
In Europe, a number of major reinsurers are withdrawing liability treaties, resulting in higher reinsurance costs and lower margins 16
Claims are likely to rise due to the recession, with insolvencies and employment-related claims major drivers 17
D&O claims have not seen any significant growth in the UK as of yet, although the future is uncertain 17
Claims notifications are on the rise, but these may not necessarily lead to a greater number of claims 17
Ballooning insolvencies are expected to increase claims by disgruntled workers and stakeholders 17
The recession has put pressure on SMEs and is resulting in more insolvencies 18
The majority of D&O claims are associated with employment issues 20
Data from the Tribunals Service shows a significant rise in dismissal- and redundancy-related claims 20
Several issues may cause a further increase in directors' and officers' insurance claims 22
Litigation funding companies may contribute towards greater claims activity 22
Disputes regarding the exhaustion limits triggering excess layers may become more common 22
The Health and Safety (Offences) Act will increase the penalties for those that break health and safety law 22
Different trends are in evidence in the US and UK directors' and officers' insurance markets 22
D&O premium rates in the UK are diverging compared with the US 22
In the US, financial institutions paid the highest average D&O premiums in 2008 23
The US has experienced a flood of class action filings, which may also affect the UK market 23
Typically, there is a lag between the notification of a class action and settlement 25
While similar, the US and the UK are not directly comparable when comparing class action lawsuits 26
Distribution Dynamics 27
Introduction 27
Large national brokers continue to distribute the vast majority of commercial insurance 27
Independent insurance intermediaries of all types retained their majority market share in 2008 27
Direct players account for a small but growing portion of the commercial general insurance market 27
Some D&O insurers are looking at going direct, while others are delegating more authority to brokers 28
Corporate partnerships have maintained only a small presence in the commercial insurance market 28
Banks and building societies distribute negligible amounts of commercial general insurance 29
Directors' and officers' insurance distribution is dominated by brokers 30
The strong level of expertise that brokers have make them the primary route to market 30
There has been a small growth in online delivery for brokers from insurers over the past few years 30
Commercial liability products are likely to remain brokered for the foreseeable future 30
The vast majority of SMEs use brokers for commercial insurance policies 31
Brokers dominate among all sizes of SMEs, though they have greater market share among larger SMEs 31
Face-to-face arrangement is popular in the market but is more prevalent among larger SMEs 32
SMEs simply prefer to use the face-to-face channel as it helps simplify the problem 33
Of those SMEs willing to buy insurance online or via the telephone, D&O was the least popular 34
Package products are the principle means through which SMEs purchase their cover 35
D&O SME penetration is one of the lowest compared with other commercial lines 36
Approximately a quarter of SMEs surveyed buy directors' and officers' liability, suggesting there is further growth potential 36
Only 15% of micro sized firms purchase directors' and officers' cover 37
There is now a strong emphasis on assessing the right carrier for a D&O policy 38
The current economic climate is prompting buyers of D&O insurance to assess their insurers solvency 38
Insurer's financial stability is the number one concern for both brokers and clients alike 39
Insurers need to know everything about their buyers 39
Standalone, higher limit directors' and officers' cover is becoming more popular among buyers 39
Non-price aspects of D&O contracts need extra attention for buyers, especially for smaller businesses 39
Competitive Dynamics 40
Introduction 40
AIG, ACE and Chubb remain the top three UK directors' and officers' insurance carriers 40
Despite its exposure to the sub-prime crisis, AIG UK still remains in healthy shape 40
ACE has grown its market share to 21% due to growth in new business 40
Chubb also managed to increase its market share, rising to 19% of the market 41
The remainder of the market is characterized by smaller and often excess insurers 41
Zurich recently extended its D&O cover for derivative claims 41
Allianz has an estimated 7.5% share of the D&O market 41
QBE had a 5% share of the market in 2008 41
The amount of D&O GWP written by the Lloyd's of London market declined slightly in 2008 43
The proportion of D&O business written by the Lloyd's market decreased 43
The majority of D&O cover written in the Lloyd's market is for financial institutions 44
Due to its syndicated nature of underwriting, the Lloyd's market is becoming increasingly favorable 45
Future Decoded 46
Introduction 46
The UK directors' and officers' insurance market is forecast to grow to £596m by 2013 46
Rate increases and increased penetration of SMEs will lead to GWP growth 46
The UK directors' and officers' insurance market will peak in terms of growth rate in 2010 47
APPENDIX 50
Definitions 50
Employers' liability 50
Professional indemnity 50
Directors' and officers' liability 50
A-side coverage 50
B-side coverage (corporate reimbursement) 50
C-side coverage (entity securities coverage) 51
Attritional losses 51
Employment Practices Liability 51
Earned premiums 51
Gross premiums 51
GWP 51
London insurance market 51
Micro, small and medium sized enterprises (SME) 51
Written premiums 52
Methodology 52
Primary and secondary research 52
Exchange rate conversions 52
Data on the Lloyd's market 52
Datamonitor's SME Insurance Survey Q2 2009 52
Datamonitor's commercial broker survey 54
Competitor estimates 55
Further reading 55
Ask the analyst 56
Datamonitor consulting 56
Disclaimer 56
List of Tables
Table 1: Total UK directors' and officers' GWP and growth rate, 2003e-08e 10
Table 2: Quarterly movement in premium rates, Q2 2005-Q2 2009 (%) 13
Table 3: UK company insolvencies, 2004-2009 20
Table 4: Dismissal and redundancy related employment tribunals, 2005-08 21
Table 5: Annual number of US class action filings, 2003-08 24
Table 6: Status of US securities class action cases by year filed, 2003-08 (%) 26
Table 7: Market share of distribution channels in the commercial general insurance market, 2004-08 (%) 30
Table 8: Estimated market shares of leading UK D&O insurers, 2006-08 (%) 42
Table 9: Lloyd's premium income and share of the total UK directors' and officers' market, 2004-08 44
Table 10: Proportion of financial institutions and non-financial institutions offering directors' and officers' cover written in the Lloyd's market (%), 2004-08p 44
Table 11: Key drivers affecting UK directors' and officers' insurance GWP, 2009f-13f 47
Table 12: UK directors' and officers' GWP, 2003e-13f (£m) 49
Table 13: Q: "What business sector are you involved in?" 53
Table 14: Q: "How large is your company in terms of number of employees?" 53
Table 15: Q: "How large is your company in terms of turnover?" 54
Table 16: What proportion of your business is commercial insurance compared to personal insurance (in terms of premium income)? 55
List of Figures
Figure 1: UK D&O premium income was estimated to have grown for the first time since 2005 3
Figure 2: UK D&O premium income was estimated to have grown for the first time since 2005 10
Figure 3: Over the last year, the rate of decline of D&O premium rates has decelerated 12
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 19
Figure 5: Dismissal- and redundancy-related employment tribunals have increased over the past 12 months 21
Figure 6: Compared with 2007, 2008 saw a 27% increase in the number of US class action filings 24
Figure 7: In 2008, no class actions were settled in the same year, indicating the market's medium-tail nature 25
Figure 8: Brokers still remain the dominant route to the market for UK commercial insurers 29
Figure 9: Unlike commercial motor, the liability line is expected to see minimal business go direct 31
Figure 10: Brokers have the highest penetration among medium-sized firms 32
Figure 11: Micro SMEs are most comfortable with arranging their cover over the telephone 33
Figure 12: There are a variety of reasons why SMEs do not use the telephone and internet channels 34
Figure 13: The majority of SMEs would prefer not to buy D&O cover over the telephone or internet 35
Figure 14: Most SMEs will purchase their insurance in the form of a package 36
Figure 15: Only a quarter of SMEs buy directors' and officers' insurance 37
Figure 16: D&O penetration is very low among micro and small sized firms 38
Figure 17: ACE and Chubb managed to gain market share in 2008 42
Figure 18: Lloyd's insurers wrote £29.5m of D&O premiums in 2008, 5.4% less than in 2007 43
Figure 19: The total UK D&O market will peak in terms of growth rate in 2010 and grow to £595.8m by 2013 48

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List of Tables
Table 1: Total UK directors' and officers' GWP and growth rate, 2003e-08e 10
Table 2: Quarterly movement in premium rates, Q2 2005-Q2 2009 (%) 13
Table 3: UK company insolvencies, 2004-2009 20
Table 4: Dismissal and redundancy related employment tribunals, 2005-08 21
Table 5: Annual number of US class action filings, 2003-08 24
Table 6: Status of US securities class action cases by year filed, 2003-08 (%) 26
Table 7: Market share of distribution channels in the commercial general insurance market, 2004-08 (%) 30
Table 8: Estimated market shares of leading UK D&O insurers, 2006-08 (%) 42
Table 9: Lloyd's premium income and share of the total UK directors' and officers' market, 2004-08 44
Table 10: Proportion of financial institutions and non-financial institutions offering directors' and officers' cover written in the Lloyd's market (%), 2004-08p 44
Table 11: Key drivers affecting UK directors' and officers' insurance GWP, 2009f-13f 47
Table 12: UK directors' and officers' GWP, 2003e-13f (£m) 49
Table 13: Q: "What business sector are you involved in?" 53
Table 14: Q: "How large is your company in terms of number of employees?" 53
Table 15: Q: "How large is your company in terms of turnover?" 54
Table 16: What proportion of your business is commercial insurance compared to personal insurance (in terms of premium income)? 55

List of Figures
Figure 1: UK D&O premium income was estimated to have grown for the first time since 2005 3
Figure 2: UK D&O premium income was estimated to have grown for the first time since 2005 10
Figure 3: Over the last year, the rate of decline of D&O premium rates has decelerated 12
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 19
Figure 5: Dismissal- and redundancy-related employment tribunals have increased over the past 12 months 21
Figure 6: Compared with 2007, 2008 saw a 27% increase in the number of US class action filings 24
Figure 7: In 2008, no class actions were settled in the same year, indicating the market's medium-tail nature 25
Figure 8: Brokers still remain the dominant route to the market for UK commercial insurers 29
Figure 9: Unlike commercial motor, the liability line is expected to see minimal business go direct 31
Figure 10: Brokers have the highest penetration among medium-sized firms 32
Figure 11: Micro SMEs are most comfortable with arranging their cover over the telephone 33
Figure 12: There are a variety of reasons why SMEs do not use the telephone and internet channels 34
Figure 13: The majority of SMEs would prefer not to buy D&O cover over the telephone or internet 35
Figure 14: Most SMEs will purchase their insurance in the form of a package 36
Figure 15: Only a quarter of SMEs buy directors' and officers' insurance 37
Figure 16: D&O penetration is very low among micro and small sized firms 38
Figure 17: ACE and Chubb managed to gain market share in 2008 42
Figure 18: Lloyd's insurers wrote £29.5m of D&O premiums in 2008, 5.4% less than in 2007 43
Figure 19: The total UK D&O market will peak in terms of growth rate in 2010 and grow to £595.8m by 2013 48
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