The collapse of Enron Corp. and other recent accounting imbroglios are making it tougher these days for corporations to get insurance coverage for their directors and officers and for their pension and 401(k) plans. When they do get it, companies are paying a lot more for coverage that has been pared back and doesn't last beyond a year. Price hikes of 40% are not unusual, as is the reluctance of many insurers to offer multi-year policies.
If that isn't enough, insurers also are requiring companies to have "more skin in the game," meaning they'll have to accept a chunk of liability through retentions and co-pays. Another fact of life is the expectation of heavy scrutiny of company finances, relationships with consultants and auditors and even the activities of executives.
Feeling The Pinch
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Call it the post-Enron world order. Ever since the energy-trading company's implosion last fall, stories about accounting scandals and other improprieties at several companies have spread like wildfire. And while the number of companies with dark clouds over them is relatively small, everyone in corporate America is feeling the pinch. Michael Rossi, president of Glendale, Calif.-based Insurance Law Group Inc., which advises risk managers, says D&O contracts are becoming non-negotiable, with only the price up for discussion. "I haven't seen that since 1993 or 1994," he says. "It is very scary." D&O premiums are up 15% to 50% from 2001, Rossi says, and have doubled for companies that recently went public. Further, insurers are just offering "off-the-shelf products, nothing special for you, no tweaking," he says
Some insurers are even reintroducing co-pays, with provisions ranging from 10% to 20%, says Mark Larson, a risk-management consultant at Tillinghast-Towers Perrin. Retentions are also going up, reflecting the perception of carriers that companies are doing little to keep the lid on rising legal settlements.
It doesn't stop at a higher price tag either. Corporate behavior is now under the microscope as well. When underwriters come in, they dig into directors' activities before granting coverage. "You are like an investigator–you read public filings, and above and beyond that, all types of periodicals," says Michael Karmilowicz, vice president of the commercial group of the Hartford Financial Products unit in New York.
Another concern is the accountant. "What is of greater importance to us [than the accountant's name] is the corporate governance that would involve relationships with an accounting firm–both audit and consulting work," says Jim Proferes, deputy D&O underwriting manager at Chubb Corp. in Warren, N.J. Companies with "creative" accounting practices face more difficulty in getting coverage, as do financially strapped companies.
Insurers likewise are tightening their underwriting on fiduciary liability policies. Ann Longmore, practice leader for fiduciary liability insurance at New York-based broker Willis, says one major insurer told her its claims experience with such insurance shows that 80% to 90% of payouts are associated with company stock in pension plans. Insurers will take notice of companies with plans that hold more than $1 billion in company stock, Longmore says, who adds those plans could see price hikes as high as 200%.
Property-and-casualty insurers face $650 million of investment losses from Enron. But the underwriting exposure is the bigger story, says insurance rating agency A.M. Best's Karen Horvath. She says that it's hard to quantify the liability losses: "A lot will depend on whether it is fraud or criminal."
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