Where to Grow: D&O for Private Companies & Non-Profits

By Mark E. Ruquet

NEW YORK—Conventional wisdom says the U.S. insurance marketplace has matured to a point where there is little room for growth. Indeed, carriers and agents fight over market share in the personal lines space with promises of lower rates or better service. In the commercial lines space, larger brokers acquire smaller firms or experienced talent to drive revenue while carriers cut rates or offer attractive terms and conditions to entice desirable business to their portfolio.

However, organic growth is still possible outside of dependence on shifting loyalties. For agents, young teens do not want to depend on Mom and Dad for the keys to the car forever. The entrepreneurial spirit can create insurance opportunities with start-ups, driving the need for myriad of coverage. Then there are markets where insurance penetration is surprisingly sparse, and the right coverage pitch and contact can lead to growth opportunities.

Within the independent insurance agent’s sweet-spot is small companies and non-profits, and as Wednesday’s Advisen conference in New York on Management Liability made clear, this is an untapped market for Directors and Officers coverage. All an agent needs to do is convince his or her client that there is a need. One effective strategy for producers is to identify individuals on non-profit boards that understand the need for D&O coverage to convince the rest of the board that there is a need. However, as many speakers attested to, convincing business owners within a family owned business, or board members of a non-profit who do not perceive risks in their decision making can be a hard sell—especially under tight budgets.

Advisen’s report, “The Private Eye: A Spotlight on the U.S. Private D&O Market,” notes that an average of 60 percent of private companies and non-profits with $100 million or more in revenue purchase D&O, while the number drops dramatically to 28 percent for entities with revenues below $100 million. To get a better idea of the market potential, there are 45 million companies registered in the United States. Of that, close to 17 million employ less than 500 people, an indicator of the number of private companies. In addition, the Census Bureau says there are more than 3 million non-profits.       

A major reason for the low take up rate is that small business owners and non-profits do not believe someone would sue them. They do not realize that litigation is costly, running into the millions of dollars in some cases, or the expanding sectors of risk such as cyber-liability, increased government regulation or the unforeseen. The fear of the rising tide of litigation presents opportunity for carriers.      

“It’s a growth market,” said Steve Anderson, an insurance industry executive. He says that despite the poor take-up rate, the industry is “more bullish” about the potential for expansion in D&O for privately held companies and non-profits as institutions face non-traditional risks.

Anderson said some of the unforeseen risks can arise from media attention over the plight of college graduates not securing work in the field they spent years pursuing their degree. The plaintiff’s bar could sue for breach of implied promise when those years of education fail to become a stepping-stone to a better life. Then there is a hospital’s board facing exposure because a patient’s stay in their facility produced an unexpected result.

“No one goes to the hospital with appendicitis and expects to walk away with a staph infection,” Anderson noted.

For buyers, Bob Adler, business administrator for Essex County Legal Aid, observed that small institutions are BOPs with professional legal liability, but carriers do not have the resources to develop the kind of relationship and education of risk they do with their large clients. The premium is too small and the number of policyholders too great. Advisen cites U.S. Census Bureau statistics putting the number of S corporations (family owned businesses) at more than 20 million. However, Adler feels carriers could help to differentiate themselves by making resources available to their customers, such as a dedicated website to give advice and counsel and suggest what risk management practices would help avoid a claim in the future. Where he finds himself turning for help is his broker, says Adler.

“What I look for in a broker is a partner in risk management,” says Adler.

“I want to deal with people who know my business and are in it,” points out Nakeschi Watkins, risk manager for Yeshiva University, adding that “carriers should be a little more aggressive” about getting the business. She says she relies on networking and reputation when choosing whom to deal with, but she too relies on her broker’s expertise in evaluating and purchasing insurance.

Carriers could do more to help with the sale, said Sandy Crystal, executive vice president for the insurance

Christopher Sparro, AIG President, Financial Lines,
U.S. & Canada Region

brokerage firm Crystal & Co. He points out that insurers have worked to make their business more efficient when selling this coverage, but they have not done enough to allow people to understand their risk. Insurers, he adds, should work to differentiate themselves in the eyes of their clients and meet their customer’s needs.

“You shouldn’t do the business if you can’t do the business for that client,” said Crystal.

D&O markets are repositioning, said Christopher Sparro, president, financial lines, U.S. and Canada Region for American International Group, as carriers push D&O prices up and seek to build profit into their books of business. However, carriers cannot expect to expand the business if they don’t supply the service customers need and find ways to differentiate themselves.

“Service, service, learning and education” is what the customer desires, said Sparro. “It is much harder to provide capabilities and service; it is easy to match terms and conditions.”