ADVISEN'S NEW D&O SEVERITY MODEL (BETA)
Looking for more objective ways to set limits for Directors & Officers liability insurance? Advisen's analytical toolkit has expanded with a new D&O Severity Model (Beta) that identifies the potential size of a D&O settlement. For Risk Managers, the notion of "potential settlement size" can be useful to evaluate limits. This model reviews each company using inputs to account for stock price fluctuation, trading volume, market cap, location, and industry classification. Each of these inputs can be changed or overridden by the user. The model is based on an extensive regression analysis on Advisen's proprietary MSCAd Large Loss database and company characteristic database.
CONSIDER THIS EXAMPLE
Your client, a $4 Billion market cap container manufacturer, has asked you to help evaluate their $30 Million D&O limit. The first thing you can do is use Advisen's Benchmarking tools to compare your client's D&O limit to that of similar companies. As the Advisen Program Benchmarking graph below demonstrates, $30 Million is perhaps a little lower than the limits purchased by similar companies. But you hunger for a way to evaluate the size of potential loss.
The D&O Severity Model (Beta) provides a baseline estimated settlement amount, along with six different scenarios that help to understand which demographic elements are driving the results. Due to the infrequent and US-dominated nature of Securities Class Action Suits (SCAS), we have limited the scope of this model to US public companies.
Our near-term development plan is to build out this online severity model with the addition of confidence intervals (ie "with 95% confidence any D&O triggering lawsuit will be under $200M"), consideration of defense costs, and visual/graphical outputs.
This Severity Model was developed by identifying the factors that have the strongest correlation with the size of loss. For Buyers of Insurance and Brokers, this model should assist the D&O insurance buying process. The output gives Risk Managers a quick reference of the limits they should consider purchasing – specific to the exposures of their company and relative to similar companies. Similarly, Advisen's tool offers Brokers better guidance when assisting their clients in managing risk. The model supports constructive dialog by supplementing the base estimate with a variety of scenarios and allows the user to change input variables as well. Our expectation is that few (if any) companies have both the breadth of Large Loss data and the company-specific data that Advisen uses to power this model.
Now back to our container manufacturer. After running the Severity model and looking in our Large Loss Data, we prepared the graph below.
The model indicates that if the client were to experience a SCAS settlement, the average amount would be $20 Million (shown in the red line). The model scenarios provide six additional values between $15 Million to $32 Million which is indicated by the range of the blue line. We also looked in our Large Loss database and found that the big outlier settlements (shown as dots) ranged up to over $80 Million for the group. Note that this $80 Million is well north of the highest limit revealed in the Program Benchmarking. Taken together, these data sets provide a richer discussion of the merits of purchasing alternative limit amounts.
BETA VERSION
The tool is being released in a Beta version to assist Advisen in developing a commercial mechanism for funding enhancements to the model. This proof of concept demonstrates that Advisen has both the data and the software development acumen to evolve this model and/or develop and host different "custom" models for individual clients.
As this is a Beta version, we certainly seek your feedback and input. Please contact Jim Blinn at jblinn@advisen.com who is willing & able to point out strengths and weaknesses of our D&O Severity Model (Beta).
ACCESS THE D&O SEVERITY MODEL (BETA)
Select the company you are interested in by using ticker or name. Now click the Losses & Exposures dropdown menu (across the top of the Advisen.com site) and choose D&O Severity Model (Beta).
ABOUT MSCAd
Advisen's Large Loss database is known as MSCAd for Master Significant Cases and Actions database. MSCAd is a collection of over 35,000 loss events totaling $900 billion. It is searchable and sortable so that you can easily produce a list of Securities cases or just Securities Class Actions, Derivative Shareholder Actions, Ponzi Schemes, etc. Our clients continue to tell us that the easiest way to support their coverage recommendations is to produce a short list of cases that illustrate similar losses at similar companies. Every case entry in MSCAd is linked to our entire company database so each loss can be related to SIC codes, market caps, employee counts, etc. And that's how this D&O Severity Model (Beta) took shape.
NEED ASSISTANCE?
To learn more about Advisen's D& Severity Model (Beta) or to receive a free copy of our QuickStart Guide to MSACd, contact Advisen at support@advisen.com.
