2nd February 2021

Finding opportunities in a challenging D&O Market

A number of market commentators have suggested that this is the most challenging Directors’ & Officers’ Liability insurance (D&O) market ever. It may be, but rather than deliberate about whether it is or not, I’d like to consider three questions that I am regularly asked by D&O buyers: 1) how the market conditions are going to affect them; 2) whether there are likely to be other options; and 3) what they can do to secure the best possible renewal outcome.

Before considering these important questions, I would just like to spend a moment explaining why the market conditions have become so difficult.

Claims frequency and severity rising

Arguably Directors’ & Officers’ Liability insurance has been under-rated for many years. Firms have been able to buy substantial levels of cover at relatively low cost, with premium rates not really reflecting the risks. In recent years these risks have increased as, in many parts of the world, changing regulatory and legal environments have placed a greater emphasis on individual accountability of senior executives. Without a doubt there have been many more regulatory and class actions. This has created an exponential growth in the frequency and severity of claims, coupled with a deterioration of prior year losses.

Insurance companies have (on the whole) been making losses in this class of insurance for a number of years, but competition made it difficult to increase rates. With the continued worsening combined ratios, in 2019 we started to see a correction and premium rates start to rise. So, the seed of a transitioning market was planted long before COVID-19. This pandemic added to the pressures with insurers fearing an avalanche of claims especially in those sectors which have suffered most, and in areas such as Employment Practices Liability.

As we entered 2021, it was clear that this was going to continue to be a tough market for D&O buyers. During the last half of 2020 we saw a substantial reduction in capacity as a number of insurers withdrew from this class of insurance, whilst those that remain closed their books to new business and/or reduced their line sizes. Broad policy wordings are being cut back, with policy extensions being closely scrutinised and higher deductibles applied.

Specialists in high demand

Some of the insurers that have withdrawn from the market had reasonable market shares, so there will be a fair number of companies seeking a new D&O insurer at renewal. These insurers particularly supported broker facilities intended to streamline the placement of D&O and enhance their earnings. These facilities have many advantages, one of which being that the broker account management team does not require D&O skill or knowledge to place the insurance, the ‘hard lifting’ has already been carried out for them by a central specialist team.

It’s unlikely the largest publicly traded firms, in say the FTSE100, were placed under these facilities, but many AIM listed and other publicly traded companies will have been. Generalist broker account management teams often manage the insurance placements for these companies. They don't have the D&O depth of knowledge and relationships that are now going to be needed to explore all the angles and secure the best possible renewal outcome. They are going to be forced to seek help from their central D&O teams, but these specialists are going to be in high demand and won’t have the capacity to give every client the time they deserve.

Companies are certainly going to face increased insurance costs and rises of four or five hundred percent are not uncommon. I have, also, seen examples recently of companies not securing alternative insurance arrangements before the expiry of their current policy. Fortunately, most have still been covered within 30-day extensions, but in one case the firm went almost four months without insurance, relying instead on the Extended Reporting Period within their expired policy.

With the right support the impact can be mitigated as there are insurers willing to consider new business, but any approach must be supported by a comprehensive and compelling risk presentation. Some insurers will want to benefit from a rising market, but accessing these opportunities requires specialist knowledge, experience and relationships.

In all walks of life, when you face a difficult situation it is normal to turn to a specialist for help and this is certainly one of those situations where a specialist who puts in the time to design and implement the right strategy can make a real difference.

To help firms Protean Risk have prepared a five-point renewal checklist, which is available at www.proteanrisk.com/directors-officers-liability

Nathan Sewell
Chairman, Protean Risk

Nathan Sewell has been a Directors' & Officers' Liability market specialist for more than 30 years. Before he founded Protean Risk in 2008 he led financial and executive risk teams at two of the world's largest insurance brokers, where he advised many AIM and publicly traded companies.

Talk to Nathan