D&O Reinsurance Pricing - A Financial Market Approach

The large number of high severity D&O losses of the past few years has affected the D&O market place creating a serious capacity crunch. The pricing of this line of business has increased dramatically while restricting coverage. This paper will present an objective methodology based on financial market theory to quantify the risk of writing a large D&O reinsurance portfolio. The authors propose that the analysis of the strong correlation between D&O class action law suits and the financial performance of companies is the most critical element in evaluating a D&O portfolio for reinsurance coverage. In addition, the authors will present mechanisms of risk transfer to capital markets based on this new methodology to obtain additional capacity.

Keywords: Class Action Law Suits, Copula, Correlation, Credit Ratings, Credit Spreads, D&O Pricing, Merton Model, Reinsurance, Securities Litigation, Stock Volatility