Tag Archives: PricewaterhouseCoopers

The New Agent-Customer Relationship

Your grandparents likely had a single insurance agent, someone they called with all of their needs and questions. Now, insurance customers are far more likely to consult Google with their questions and sometimes skip an agent altogether.

The dynamic has changed. Consumers who once valued the agent relationship now prioritize instant changes and self-service. But agents still have an opportunity to capture customers with even the most modern preferences, preserving that mutually beneficial relationship between agent and customer.

About half of insurance shoppers obtain a quote through an insurer website before purchasing a policy, according to J.D. Power’s 2016 U.S. Insurance Shopping Study. Despite this, only 25% actually buy their policy online, according to the report, and half complete the sale through direct contact with an agent.

It’s easy to feel discouraged by the move to automation and online services. As an agent, your skills lie in matching customers with the right insurance policies. The fact that about half of all insurance customers buy through an agent means you shouldn’t lose hope. Although the industry is in flux and customer preferences are changing, it’s still possible for you to do what you do best.

See also: How to Support the Agent of the Future

Help customers navigate the insurance landscape

We’ve all seen bad information and advice doled out online as expertise. You recognize it for what it is, but consumers might not. They don’t always know how to weigh the value or validity of what they find. This is where you can help.

Be an online guide for people by:

  • Sharing worthwhile articles and websites on social media and via email. Add value to what you share by offering your own short commentary.
  • Pointing out examples of bad advice or inaccuracies and pairing these red flags with your accurate, expert information.
  • Sending on-the-fence customers out with reliable resources. If you can’t close the deal today, know your lead will likely go online to do additional research. If you point them toward good information, they’ll be more likely to return to the source when they’re ready to buy.

Be available

Modern customers don’t want to wait for a response, so don’t make them.

According to a PricewaterhouseCoopers 2014 survey that asked customers why they purchased a policy online, 60% responded that the “24/7 availability” of online services was a contributing factor, second only to “ease of access.” No one is suggesting you make yourself available to clients all day and night, but agents who keep flexible hours and answer phone calls the first time may have an advantage.

Let customers know you’re accessible by:

  • Answering the phone, every time. Show your customers that even when you’re busy, you can make time for them. It’s better to say hello and ask if you can call a client back than to send them to voicemail.
  • Following up when a customer is waiting to hear back from you. Even if it’s a call or text to say you need another hour to finalize their quote, they won’t have to wonder whether you’ve forgotten about them entirely.
  • Responding to social media and email requests with the same urgency as phone calls. Customers go online for availability and ease of access, so deliver that to them. Demonstrate that these qualities can come from attentive agents, not just automated online services.

Don’t abandon old-school techniques

Agents of days gone by knew the value of having ongoing relationships with their customers, and that value still exists. Sure, modern customers want quick, easy service, but there’s a reason half call an agent to close the deal.

See also: How the Customer Experience Is Shifting  

Create this mutually rewarding relationship by:

  • Being proactive. It’s easy to fall into reactive mode with current consumer preferences, but use online contacts and a lead-generation service as jumping-off points. Each introduction should be seen as the beginning of something long-term, not just a single transaction.
  • Striving to be that single source of information, like agents of past generations. Act as a risk advisor, identifying opportunities for clients to protect their assets throughout their life.
  • Focusing on the customer, not the policies. Know your client base, their families and their lifestyle. This will come through in your communications, and you’ll be better prepared to offer your customers the best insurance for their needs.

New Approach to Cyber Insurance

The most active players in the fledgling but fast-growing cyber insurance market are hustling to differentiate themselves.

The early adopters and innovators are doing so by accelerating the promotion of value-added services—tools and systems that can help companies improve their security postures and thus reduce the likelihood of ever filing a cyber damages claim.

As more businesses look to purchase cyber liability policies, insurance sellers are striving to dial up the right mix of such services, a blend that can help them profitably meet this pent-up demand without taking on too much risk.

The incentive is compelling: Consultancy PricewaterhouseCoopers estimates that the cyber insurance market will grow from about $2.5 billion in 2014 to $7.5 billion by 2020. European financial services giant Allianz goes a step further with its prediction that cyber insurance sales will top $20 billion by 2025.

This anticipated growth in demand for cyber liability coverage—coupled with the comparatively low level of loss claims—has created strong competition in this nascent market.

The Insurance Information Institute estimated last year that about 60 companies offered standalone cyber liability policies. In total, more than 500 insurers provide some form of cyber risk coverage, according to a recent analysis by the National Association of Insurance Commissioners.

“There are quite a few players, so they are looking for ways to differentiate themselves and find competitive edges,” says David K. Bradford, co-founder and chief strategy officer for Advisen, an insurance research and analysis company.

Insurance companies make adjustments

Insurance carriers hot after a piece of this burgeoning market are beginning to offer value-added services to make their cyber offerings stand out.

See also: 8 Points to Consider on Cyber Insurance  

Rather than growing these services in-house, most are partnering with vendors and consultants that specialize in awareness training, network security and data protection. Services that boost the value of cyber policies are being supplied for free, or offered at a discount.  Typical cyber insurance valued-added services include:

  • Phishing and cyber hygiene awareness training
  • Incidence response planning
  • Security risk assessments
  • Best practices web portals and software-as-a-service tools
  • Threat detection services
  • Employee and customer identity theft coverage
  • Breach response services

One measure of value-added services gaining traction comes from the Betterley Report, which recently surveyed 31 carriers that offer cyber policies. Betterley found that about half offered “active avoidance services,” while nearly all offered some sort of pre-breach planning tools.

Rick Betterley, president of Betterley Risk Consultants, which publishes the Betterley Report, says there is still a long way to go. “There’s much more that can be done to help the insureds be better protected,” he says.

Betterley is a big proponent of adding risk-management services to cyber policies. He calls the approach Cyber 3.0, adding that it’s akin to the notion of insuring a highly protected risk in a property insurance policy. Cyber value-added services, he says, are the equivalent of fire insurance companies requiring sprinklers.

“It’s not required that insurance companies provide the services, but it’s required that they help insureds identify what services are likely to generate a reduction in premiums,” Betterley says.

Sector faces new challenges

That said, the cyber insurance sector is still finding its way. With auto crashes, fire or natural disasters, losses are well defined and fully understood. Cyber exposures, by contrast, are hard to pin down. Network vulnerabilities are extremely complex and continually evolving. And historic data on insurance claims related to data breaches remains, at least for the moment, in short supply.

An added challenge, Betterley says, is that insurance companies are unable to satisfactorily measure the effectiveness of security technologies and services in preventing a data breach.

Advisen’s Bradford agrees. “It’s a rapidly evolving area that changes day to day, and underwriters are definitely wary of recommending a particular vendor or approach,” he says.

Eventually, the insurance industry will figure out how to make meaningful correlations and separate the wheat from the chaff.

“In bringing in these value-added services, we can help shore up some of those areas where we’re seeing human error,” observes Dave Wasson, cyber liability practice leader at Hays Cos., a commercial insurance brokerage and risk management consultancy. “We’ll be at a point where we’ll know what makes a difference, and we can put our money, time and efforts into those solutions.”

Eric Hodge, director of consulting at IDT911 Consulting, part of IDT911, which underwrites ThirdCertainty.com, concurs. One ironic result of the recent spike of ransomware attacks aimed at businesses, Hodge says, is that more hard data is getting generated that is useful for calculating loss profiles.

See also: Another Reason to Consider Cyber Insurance  

Along the same lines, settlements of class-action lawsuits related to breaches of high-profile retailers, such as Target and Sony, is helping amass data that will help the industry flesh out evolving actuarial tables.

“Losses from cyber attacks and data breaches are becoming easier to quantify,” Hodge says. “And market forces are absolutely lining up to reward the wider use of these activities. It’s harder to ignore the fiscal argument for an insurer to go the extra mile in helping the insured organizations make sure that a costly breach doesn’t occur.”

AIG blazes trail

One notable proponent leading the way is multinational insurance giant AIG, which is nurturing partnerships with about a half-dozen cybersecurity vendors.

AIG services—some of which are offered to policyholders at no cost—range from threat intelligence and cyber risk maturity assessments to active detection and vulnerabilities assessments.

RiskAnalytics, one of AIG’s partner vendors, provides threat intelligence services, including a service that detects and shuns blacklisted IP addresses. Any AIG insured with a minimum $5,000 policy can participate at no additional cost.

The company’s partnership is exclusive to AIG, and appears to be very popular.

“We’re bringing in multiyear contracts, and the average sales price is on an impressive trajectory,” says RiskAnalytics Chief Operative Officer Kurt Lee. “It’s all born out of (customers) using that (introductory) service through the policy.”

Recognizing the trend, more vendors are seizing the opportunity to market their services to insurance carriers.

Vendors are willing to jump through the many hoops because a partnership with an insurance company is an opportunity to get a soft introduction to a potential client, says Mike Patterson, vice president of strategy at Rook Security, a managed security services provider (MSSP) that is reaching out to carriers.

Dismantling roadblocks

As with any new approach, broad adoption of cyber insurance value-added services isn’t without hurdles. One major obstacle is the “’this-isn’t-how-we’ve-always-done-it’ way of thinking,” says IDT911’s Hodge. “It’s like trying to change our election processes—people resist altering a system that has been in place for a couple hundred years.”

Another barrier is cost. Insurance companies tend to reserve free or discounted added services for heavyweight clients that spend small fortunes on annual premiums, says John Farley, vice president and cyber risk practice leader at insurance brokerage HUB International.

“Carriers can’t give away a lot of resources, so the smaller premium payers are not getting a lot of these services,” Farley says. “But if they can streamline and automate resources and figure out how to get customizable, usable information to the insurance buyer, that insurance carrier will probably stand out.”

Brian Branner, RiskAnalytics’ executive vice president, says that’s exactly one of the benefits that AIG derives from their partnership.

“If we can get the insureds to use the services we provide, we should lower AIG’s loss ratio because they’ll be safer organizations, and AIG should receive less claims,” he says.

Hidden costs of a breach can affect a large enterprise for years, and prove catastrophic to a small business. So insurance companies in the vanguard are looking to find business clients that are taking information security seriously.

See also: The State of Cyber Insurance  

As more companies buy cyber policies, and use any attendant services, the result could be a halo effect, says IDT911’s Hodge.

“This is certainly something that the insurers are counting on,” Hodge says. “A more secure buyer is a lower actuarial risk to the insurer.”

Meanwhile, policyholders should steadily become better equipped to securely do business in an internet-centric economy riddled with evolving exposures.

Hodge says: “In my experience, the buyer is often pleasantly surprised by the improvement that can come about quickly in terms of knowing their risk, being compliant with their industry standards and being able to indicate to the marketplace that they are taking good care of their customer’s information.”

This post originally appeared on ThirdCertainty. It was written by Rodika Tollefson.

What Gig Economy Means for Insurers

I consider myself extremely lucky. I have a front row seat to a monumental shift in consumer behavior, which translates into important opportunities, and risks, for traditional insurance providers.

I don’t plan on sitting back and watching the show from a distance, I’m getting involved. Although for the record, I am not a good actor. Maybe I’ll take a gig with the stage crew.

The shift I am referring to is the so-called gig economy. Some use synonyms like the sharing economy, access economy or collaborative consumption. The list goes on. All of these terms boil down to one important reality: the ability to turn otherwise unproductive assets into income-producing ones through micro jobs, or “gigs.”

These assets include cars, homes, consumer items, hobbies and spare time.

As a vote of confidence to this new trend, Merriam-Webster added the term “sharing economy”: Sharing Economy (Noun): economic activity that involves individuals buying or selling usually temporary access to goods or services, especially as arranged through an online company or organization. 

According to PricewaterhouseCoopers (PWC), the estimated value of the sharing economy sector by 2025 will be $335 billion. For 2013, that same number was $15 billion. In just more than 10 years, then, PWC predicts that the value of the sharing economy will skyrocket by more than $300 billion.

See also: How to Insure the Sharing Economy

recent TIME Magazine study reports that 45 million American adults participate in the sharing economy. This is 1 in 5 American adults! Let that number sink in for a moment.

You good? Okay, let’s continue.

The explosive growth in the sharing economy is occurring amid a backdrop of larger social, economic and demographic trends. These include:

  • Increasing urbanization (people have less space)
  • Aging demographics (older people have less money and need more services)
  • A shift in consumer behavior from ownership to access

In an excellent 2015 Insurance Thought Leadership article, Neil Howe concluded that, “although some dismiss the gig economy as a fad, a hard look at the numbers shows it’s both large and growing, with profound implications.”

So, business is booming, consumers are participating and socio-demographic trends support the growing sharing economy sector. What does this mean for the insurance industry as a whole? A lot.

Let me explain.

Today, I want to plant a seed. Well, as a matter of fact the seed has already been planted, a number of times by a number of entrepreneurs. What we are doing today is watering those seeds. The insurance industry is thirsty for disruption, and this is a good thing.

Insurance Industry, Meet Sharing Economy: An Introduction

In January, I wrote about my company, WeGoLook, and its applicability to traditional insurance operations. Specifically, we discussed the challenges the industry faces because its slow processing of claims can’t continue in an age where customers demand immediate access to information, as well as the opportunities that the demands create for innovators like WeGoLook. Thanks, millennials!

Today, I want to delve deeper into the disruption of this new gig economy, or sharing economy, in an effort to unpack some of the opportunities that are staring directly at us.

The insurance industry is currently at a technological and innovative crossroads. To take the correct path, strong leadership is required. Lucky for us, you don’t have to be an industry expert to be an industry leader.

The founders of Airbnb quickly began competing with (and surpassing!) large hotel chains, with zero knowledge about the accommodation industry — except being proficient at inflating air mattresses. Similarly, Uber quickly disrupted the taxi and transportation verticals with no industry experience. We live in an age where we either adapt or risk getting left behind as technology marches on. So, it’s imperative that we as industry experts fully understand how to incorporate new business models in our value chain.

See also: ‘Gig Economy’ Comes to Claim Handling

That’s what I hope to achieve in my business; to help lead us into a new era where innovation is understood, adopted and refined. I believe this is your goal, as well; after all, you are a subscriber to Insurance Thought Leadership.

So how can the new gig economy plug into traditional carrier business operations?

The Gig Economy: WeGoLook and Flexible Workers

Slowly, we are realizing that the insurance industry as a whole is one of financial arbitrage, rather than logistics. Why would a large insurance firm employ thousands of boots on the ground nationwide when gig economy companies such as mine have access to a flexible and ready workforce available at the tap of a smartphone? B2B crowdworkers can quickly gather information for underwriting and claims processing. These workers also have the ability to retrieve police reports, notarize documents, pick up salvage items, deliver documents and much more.

Remember, the sharing economy is about leveraging underutilized assets, including spare time, to fulfill both consumer and business requirements.

Crowdworkers offer four main benefits to traditional carriers:

1. Faster Flow of Information

As we all know, processing claims requires time and patience to gather relevant information, photographs and a myriad of other documentation. Getting the right information and accurate documentation can take even longer.

Yet, commercial policyholders need to know how quickly they will be receiving funds from a claim so they may, in turn, inform their customers. Similarly, individual policyholders need a claim settled without delay so they can return to normal life. This is just good business practice.

Digital and mobile platforms provide a faster flow of information. They also allow for the easier integration of crowdworkers while making sure that the right information flows into the right hands at the right time. For example, the WeGoLook mobile application directs our Lookers, those gig workers we were talking about earlier, to capture on-site data in the form of photos, video, measurements, answers to specific questions and more.

2. Ordering Efficiencies for Claim Handlers

While carriers worry about the massive rework that needs to be done to update back-end systems for the demands of today’s customers, a system like ours can be used as a front end that obviates the need for much of that work. For instance, once an order has been uploaded, WeGoLook will contact the policyholder to schedule an on-site inspection appointment, removing the task from the carrier’s workflow. The claim handler at the carrier can easily make special language or expertise requests, such as the requirement for a Looker who is also a notary, and not have to worry about logistics. WeGoLook technology allows for the claim handler to view video and photos within the report — even when the carrier’s back-end does not support video.

For good measure, because new systems are written from scratch and don’t carry all the baggage of legacy systems, users of our ordering dashboard can place an order for a Looker within an average of four minutes, compared with 12 minutes in traditional systems used to dispatch field assignment representatives.

See also: On-Demand Economy Is Just Starting

3. Customization and Security

Writing from scratch also lets new companies customize reports to the needs of clients, letting them view data however they like. Nothing changes, no matter the location of the policyholder or asset.

4. Cost Efficiencies

Finally, while I am the first to acknowledge that an on-demand workforce does not fully replace technical or specially certified field personnel, such as claims adjusters, a flexible workforce can be dispatched at the click of a button and can certainly augment, and in some cases, replace the need for full-time field staff.

Efficiencies emerge in the form of salary costs, fleet vehicle costs, travel expenses, labor costs and much more.

Yes, there will always be the need for an experienced field adjuster to be present under a number of circumstances. However, this is not the bulk of required work, and traditional carriers are wising up to this fact.

Conclusion, for Now

We believe that insurance should be smart and streamlined and adapt to customer needs. And these needs are changing rapidly within our disruptive environment. Insurers need to make their workforces more flexible by taking advantage of the gig economy.

The seed has been planted. The question now is, will the landscape become an innovation desert. Or, can we help foster and develop a fertile growing climate, reminiscent of the Oklahoma grain farms I grew up with.

I strongly believe it is the latter. I’m carrying a watering can and have my gardening gloves on.

Good luck, and don’t forget to water regularly!

Future of Securities Class Actions

Securities litigation has a culture defined by multiple elements: the types of cases filed, the plaintiffs’ lawyers who file them, the defense counsel who defend them, the characteristics of the insurance that covers them, the way insurance representatives approach coverage, the government’s investigative policies – and, of course, the attitude of public companies and their directors and officers toward disclosure and governance.

This culture has been largely stable over the nearly 20 years I’ve defended securities litigation matters full time. The array of private securities litigation matters (in the way I define securities litigation) remains the same – in order of virulence: securities class actions, shareholder derivative litigation matters (derivative actions, board demands and books-and-records inspections) and shareholder challenges to mergers. The world of disclosure-related SEC enforcement and internal corporate investigations is basically unchanged, as well. And the art of managing a disclosure crisis, involving the convergence of shareholder litigation, SEC enforcement and an internal investigation involves the same basic skills and instincts.

But I’ve noted significant changes to other characteristics of securities-litigation culture recently, which portend a paradigm shift. Over the past few years, smaller plaintiffs’ firms have initiated more securities class actions on behalf of individual, retail investors, largely against smaller companies that have suffered what I call “lawsuit blueprint” problems such as auditor resignations and short-seller reports. This trend – which has now become ingrained into the securities-litigation culture – will significantly influence the way securities cases are defended and by whom, and change the way that D&O insurance coverage and claims need to be handled.

Changes in the Plaintiffs’ Bar

Discussion of the history of securities plaintiffs’ counsel usually focuses on the impact of the departures of former giants Bill Lerach and Mel Weiss. But although the two of them did indeed cut a wide swath, the plaintiffs’ bar survived their departures just fine. Lerach’s former firm is thriving, and there are strong leaders there and at other prominent plaintiffs’ firms.

The more fundamental shifts in the plaintiffs’ bar concern changes to filing trends. Securities class action filings are down significantly over the past several years, but, as I have written, I’m confident they will remain the mainstay of securities litigation and won’t be replaced by merger cases or derivative actions. There is a large group of plaintiffs’ lawyers who specialize in securities class actions, and there are plenty of stock drops that give them good opportunities to file cases. Securities class action filings tend to come in waves, both in the number of cases and type. Filings have been down over the last several years for multiple reasons, including the lack of plaintiff-firm resources to file new cases as they continue to litigate stubborn and labor-intensive credit-crisis cases, the rising stock market and the lack of significant financial restatements.

Although I don’t think the downturn in filings is, in and of itself, very meaningful, it has created the opportunity for smaller plaintiffs’ firms to file more securities class actions. The Reform Act’s lead plaintiff process gives plaintiffs’ firms incentives to recruit institutional investors to serve as plaintiffs. For the most part, institutional investors, whether smaller unions or large funds, have retained the more prominent plaintiffs’ firms, and smaller plaintiffs’ firms have been left with individual investor clients who usually can’t beat out institutions for the lead-plaintiff role. At the same time, securities class action economics tightened in all but the largest cases. Dismissal rates under the Reform Act are pretty high, and defeating a motion to dismiss often requires significant investigative costs and intensive legal work. And the median settlement amount of cases that survive dismissal motions is fairly low. These dynamics placed a premium on experience, efficiency and scale. Larger firms filed most of the cases, and smaller plaintiffs’ firms were unable to compete effectively for the lead plaintiff role or make much money on their litigation investments.

This started to change with the wave of cases against Chinese issuers in 2010. Smaller plaintiffs’ firms initiated most of them, as the larger firms were swamped with credit-crisis cases and likely were deterred by the relatively small damages, potentially high discovery costs and uncertain insurance and company financial resources. Moreover, these cases fit smaller firms’ capabilities well; nearly all of the cases had “lawsuit blueprints” such as auditor resignations or short-seller reports, thereby reducing the smaller firms’ investigative costs and increasing their likelihood of surviving a motion to dismiss. The dismissal rate has indeed been low, and limited insurance and company resources have prompted early settlements in amounts that, while on the low side, appear to have yielded good outcomes for the smaller plaintiffs’ firms.

The smaller plaintiffs’ firms thus built up a head of steam that has kept them going, even after the wave of China cases subsided. For the last year or two, following almost every “lawsuit blueprint” announcement, a smaller firm has launched an “investigation” of the company, and smaller firms have initiated an increasing number of cases. Like the China cases, these tend to be against smaller companies. Thus, smaller plaintiffs’ firms have discovered a class of cases – cases against smaller companies that have suffered well-publicized problems that reduce the plaintiffs’ firms’ investigative costs – for which they can win the lead plaintiff role and that they can prosecute at a sufficient profit margin.

To be sure, the larger firms still mostly can and will beat out the smaller firms for the cases they want. But it increasingly seems clear that the larger firms don’t want to take the lead in initiating many of the cases against smaller companies and are content to focus on larger cases on behalf of their institutional investor clients.

These dynamics are confirmed by recent securities litigation filing statistics. Cornerstone Research’s “Securities Class Action Filings: 2014 Year in Review” concludes that (1) aggregate market capitalization loss of sued companies was at its lowest level since 1997 and (2) the percentage of S&P 500 companies sued in securities class actions “was the lowest on record.” Cornerstone’s “Securities Class Action Filings: 2015 Midyear Assessment” reports that two key measures of the size of cases filed in the first half of 2015 were 43% and 65% lower than the 1997-2014 semiannual historical averages. NERA Economic Consulting’s “Recent Trends in Securities Class Action Litigation: 2014 Full-Year Review” reports that 2013 and 2014 “aggregate investor losses” were far lower than in any of the prior eight years. And PricewaterhouseCoopers’ “Coming into Focus: 2014 Securities Litigation Study” reflects that, in 2013 and 2014, two-thirds of securities class actions were against small-cap companies (market capitalization less than $2 billion) and that one-quarter were against micro-cap companies (market capitalization less than $300 million). These numbers confirm the trend toward filing smaller cases against smaller companies, so that now, most securities class actions are relatively small cases.

Consequences for Securities Litigation Defense

Securities litigation defense must adjust to this change. Smaller securities class actions are still important and labor-intensive matters – a “small” securities class action is still a big deal for a small company and the individuals accused of fraud, and the number of hours of legal work to defend a small case is still significant. This is especially so for the “lawsuit blueprint” cases, which typically involve a difficult set of facts.

Yet most securities defense practices are in firms with high billing rates and high associate-to-partner ratios, which make it uneconomical for them to defend smaller litigation matters. It obviously makes no sense for a firm to charge $6 million to defend a case that can settle for $6 million. It is even worse for that same firm to attempt to defend the case for $3 million instead of $6 million by cutting corners – whether by under-staffing, over-delegation to junior lawyers or avoiding important tasks. It is worse still for a firm to charge $2 million through the motion to dismiss briefing and then, if it loses, to settle for more than $6 million just because it can’t defend the case economically past that point. And it is a strategic and ethical minefield for a firm to charge $6 million and then settle for a larger amount than necessary so that the fees appear to be in line with the size of the case.

Nor is the answer to hire general commercial litigators at lower rates. Securities class actions are specialized matters that demand expertise, consisting not just of knowledge of the law but of relationships with plaintiffs’ counsel, defense counsel, economists, mediators and D&O brokers and insurers.

Rather, what is necessary is genuine reform of the economics of securities litigation defense through the creation of a class of experienced securities litigators who charge lower rates and exhibit tighter economic control. Undoubtedly, that will be difficult to achieve for most securities defense lawyers, who practice at firms with supercharged economics. The lawyers who wish to remain securities litigation specialists will thus face a choice:

  1. Accept that the volume of their case load will be reduced, as they forego smaller matters and focus on the largest matters (which Biglaw firms are uniquely situated to handle well, on the whole);
  2. Rein in the economics of their practices, by lowering billing rates of all lawyers on securities litigation matters, and by reducing staffing and associate-to-partner ratios; or
  3. Move their practices to smaller, regional defense firms that naturally have more reasonable economics.

I’ve taken the third path, and I hope that a number of other securities litigation defense lawyers will also make that shift toward regional defense firms. A regional practice can handle cases around the country, because litigation matters can be effectively and efficiently handled by a firm based outside of the forum city. And they can be handled especially efficiently by regional firms outside of larger cities, which can offer a better quality of life for their associates and a more reasonable economic model for their clients.

Consequences for D&O Insurance

D&O insurance needs to change, as well. For public companies, D&O insurance is indemnity insurance, and the insurer doesn’t have the duty or right to defend the litigation. The insured selects counsel, and the insurer has a right to consent to the insured’s selection, but such consent can’t be unreasonably withheld. D&O insurers are in a bad spot in a great many cases. Because most experienced securities defense lawyers are from expensive firms, most insureds select an expensive firm. But in many cases that spells a highly uneconomical or prejudicial result, through higher than necessary defense costs or an early settlement that doesn’t reflect the merits but that is necessary to avoid using most or all of the policy limits on defense costs.

Given the economics, it certainly seems reasonable for an insurer to at least require an insured to look at less expensive (but just as experienced) defense counsel before consenting to the choice of counsel – if not outright withholding consent to a choice that does not make economic sense for a particular case. If that isn’t practical from an insurance law or commercial standpoint, insurers may well need to look at enhancing their contractual right to refuse consent or even to offer a set of experienced but lower-cost securities defense practices in exchange for a lower premium. It is my strong belief that a great many public company CFOs would choose a lower D&O insurance premium over an unfettered right to choose their own defense lawyers.

Because I’m not a D&O insurance lawyer, I obviously can’t say what is right for D&O insurers from a commercial or legal perspective. But it seems obvious to me that the economics of securities litigation must change, both in terms of defense costs and defense-counsel selection, to avoid increasingly irrational economic results.