How to use the new 2010 D&O Global Peer Benchmarking Report to ensure proper D&O coverage

Now more than ever there is transparency when it comes to directors and officers (D&O) liability insurance. Where there once wasn't a source of useful information for comparing a business's D&O coverage with that of other relevant organizations, now there's new peer benchmarking data that not only helps determine proper levels of coverage, but also helps ensure competitive pricing. "The data can help you assess the cost, quality, size and structure of your own D&O program, relative to your peers," says Ralph Semeraro, managing director, Aon Risk Solutions, Financial Services Group. "[It] can provide the requisite due diligence and support needed to demonstrate to your board and management that your D&O coverage is comparable to other companies in a similar market capitalization range or industry sector."

And while some might argue that peer data encourages companies to buy higher insurance limits, companies may use the peer benchmark report to help justify lower limits. What's more, D&O program decisions, such as the balance between personal asset protection and corporate risk transfer, may create tension between the interests of management and shareholders. Effective use of quality peer data can help companies demonstrate the due diligence undertaken in such a decision. "Knowing how much D&O coverage your peers are buying is helpful, but it can be even more powerful to know how much they are paying for it," Semeraro says.

How to use peer data

Although most companies define their peers by industry, market capitalization is a more meaningful factor when assessing D&O exposure and choosing D&O limits. That's because a drop in market capitalization is the key metric in calculating investor losses and, ultimately, damages.

Industry peer group is another important factor, but more so in predicting the likelihood of being sued. Some industries also have accounting rules that are more complex and open to scrutiny. Once an accounting issue or industry practice becomes a problem at one company, plaintiffs' attorneys often target other companies in the same industry, hoping to find similar fact patterns.

D&O insurers adjust their liability insurance pricing based on the likelihood of litigation, so industry peer group can be a good benchmark for pricing.

Asset size is often used as a benchmarking tool in other lines of insurance. Though market capitalization is still the most significant factor, it can be difficult to pick a peer group when a company experiences significant volatility in its stock price. The optimal peer group represents a narrow market capitalization range within an industry.

Other factors that reflect your company's unique risk profile: mergers and acquisitions activities, business or accounting complexities, and board and corporate-risk philosophies.

the latest results

At a time when economic pressures are forcing many companies to trim expenses, D&O insurance benchmarking offers an effective way to mitigate insurance costs. The 2010 D&O Global Peer Benchmarking Report, presented by NASDAQ OMX in partnership with Aon, provides insights into the D&O insurance purchasing practices of more than 585 public companies, representing 18 countries, along with key data on industry issues and trends. Among the key findings:

Pricing: The year 2009 marked another year of D&O insurance premium declines for the majority of S&P companies. Even financial institutions, which were the only industry group in 2008 to see an increase, experienced a decrease, proving that solid benchmarking data can be a powerful tool.

Still, this sector, along with Life Sciences and Information Technology (in particular Semiconductors), continues to pay higher-than-average D&O premiums. If you are paying more than your peers but have a similar or better risk profile, you may be able to generate competition to lower your premium to a level more consistent with the market.