D&O underwriting analytics now available in CoMeta!
- Evaluate the likelihood publicly traded U.S. companies will face shareholder litigation in the coming 12 months due to idiosyncratic and systemic factors
- State-of-the-art predictive analytics powered by high-quality, regularly updated company-level data highlights companies at elevated “baseline” risk of shareholder litigation
- Complementary emerging risk analytics indicate the likelihood companies will be embroiled in systemic mass litigation events that could lead to shareholder litigation
Praedicat introduced the company risk score for general liability underwriting in CoMeta in 2021. We’re now pleased to announce the release of a comparable solution for D&O underwriting. Search for an account (1) and, based on a risk score that ranges between 0-100 (2), decide whether additional investigation is warranted. A high risk score in the search dialogue indicates either an elevated baseline or emerging D&O risk score. A high baseline D&O risk score (3) means observable attributes of the company suggest an elevated likelihood the company will face shareholder litigation for any reason. A high emerging D&O risk score (4) means the company engages in business activities that expose it to ongoing or future mass litigation events that could lead to follow-on shareholder litigation.
The baseline D&O risk model
The baseline D&O risk model was developed by Experian, one of the world's largest consumer and commercial credit reporting companies. Experian trained the baseline D&O risk model on securities class action between 2012-17 and validated the model against hold-out data in 2018-19. The overall performance of the model can be characterized in a variety of ways, but perhaps the simplest descriptive statistic is that 50 percent of all securities class actions filed in the hold-out data occur among companies scoring in the upper two deciles of the risk score distribution. Fewer than two percent of securities class action occur among companies scoring in the bottom two deciles of the risk score distribution.
Experian tested hundreds of company attributes in developing the model and 16 attributes with the greatest combined predictive power were selected for the version available in CoMeta. Company attributes fall into four categories:
- Commercial credit worthiness
- Stock volume and price volatility
- Stock transactions among D&O's
- Experience and turnover of D&O's
The baseline risk drivers visualization (5) provides a relative metric of each attribute’s impact, where impact is a combination of the attribute’s overall predictive power in the model and how extreme that attribute’s value is for the selected company. Red scores indicate that the attribute pushes the company risk score up from the overall mean of 50, while green scores indicate that the attribute pushes the company risk score down from the mean. The longer the bar, the more impact that attribute has for the selected company.
The baseline risk score ranges between 0-100, with the chance of a securities class action over the coming 12 months increasing with the score. A score of 50 corresponds to a chance of securities class action of 3%; a score of 99 corresponds to a chance of securities class action of 27%. Validation against the D&O claiming experience of several insurers indicates that the model probabilities correspond well with D&O claims stemming from all sources, which is why the D&O underwriting feature labels this probability as “chance of D&O claim.”
The emerging D&O risk model
Emerging D&O risk scores are derived from Praedicat’s liability catastrophe model, which is deployed in CoMeta’s exposure management and GL company underwriting features. The liability catastrophe model estimates the likelihood a company will be named in bodily injury mass litigation and the severity of that litigation in terms of both settlements and defense costs. For the purposes of the emerging D&O risk score, probabilities are calculated over a two-year period; severity does not contribute to the risk score.
The table available when clicking on emerging risk drivers (6) indicates the specific hazards (Litagion agents) that contribute to the company’s overall emerging D&O risk score. The component risk score, which provides an indication of the relative importance of the hazard for the selected company, is calculated as if the indicated hazard is the only hazard that exposes the company to bodily injury mass litigation. “Link probability” indicates the degree of confidence that the company is engaged in an activity that involves the hazard. Clicking on a hazard name in the table, opens a new table that indicates the specific business activities of the company that involve the hazard. Users can also start with the business activities (7) that contribute to the company’s overall emerging D&O risk score and then drill down to the hazards associated with those business activities.