How a Company Can Objectively Determine D&O Insurance Limits

When I speak with C-suite executives at companies across the U.S. about how they determine the optimal Directors & Officers (D&O) insurance limits to purchase, the overwhelming response is:

“We rely on peer benchmarking data provided by our insurance broker/advisor.”?

My response to that is, “How can you be sure that the insurance limits and retentions your peers are buying are the right amounts for your own company?”?

After all, relying solely on benchmarking data may simply mean that a company and its peers are making the same wrong buying decisions, given the likely differences in risk tolerance, exposures, and overall buying habits.?

Economically, a company buys D&O coverage to transfer its indemnity obligation from the balance sheet to insurance. So, wouldn’t it be ideal to confirm whether the limits and retentions provide the most efficient financial protection against future claims?

Below is a 5-step blueprint to help your company determine optimal D&O limits to purchase and the level of risk it should retain.

1. Identify risk factors specific to your company.
2. Model the average retained D&O losses.
3. Assess the opportunity cost of retaining the volatility on the balance sheet.
4. Contrast these results with alternative insurance program structures.
5. Determine the value of transferring risks to the insurance marketplace.

This objective approach, distinct from benchmarking, transforms the process into a cost-benefit analysis, treating insurance as an investment vehicle rather than a simple transaction. It effectively protects the balance sheet by analyzing the severity and frequency of potential claims based on the company's risk profile.

By shifting the focus from benchmarking to a company-specific analysis, you ensure that your D&O insurance strategy aligns with your unique risk profile and financial goals. Rather than following industry trends, you can make data-driven decisions that optimize protection and cost efficiency. This approach not only safeguards your balance sheet but also strengthens your company's overall financial resilience. In an environment where risk is ever-evolving, taking control of your D&O limits is a proactive step toward long-term success.

David Turner specializes in delivering comprehensive insurance and risk management solutions for financial institutions.?When not helping companies make better-informed insurance decisions, he can likely be found on a tennis court or enjoying the East Village of NYC where he lives with his wife and two children.