The directors’ and officers’ liability insurance market for large risks is in transition, with previously seen rate decreases unlikely for the foreseeable future.
Directors’ and officers’ liability (D&O) insurance premium rates have fallen year on year for the last eight years, following the high rates imposed at the time of the global financial crisis.
In 2016 and particularly 2017, however, underwriting results have deteriorated across the market. Insurers have cited numerous reasons for this, including:
An unprecedented number of securities class action claims (opens a new window) in the US,
Large class action claims in Australia (partly as a result of litigation funding (opens a new window) driving increased shareholder claims),
In 2016 and 2017 underwriting results have deteriorated across the market.
Increased regulatory investigations in Europe and the UK, often related to bribery and corruption allegations, with greater cross-border co-operation between separate enforcement bodies and regulatory agencies,
More protracted and complex lawsuits, and more follow-on suits after a company has been investigated and fined. (Regulatory bodies have a stated intent to pursue recoveries against individuals for a company’s failure to comply with regulation.)
Increased severity from high-profile corporate scandals such as VW (opens a new window), Tesco (opens a new window), Petrobras (opens a new window), FIFA (opens a new window) and Equifax (opens a new window).
The $100bn-plus insurance losses from the 2017 North American natural disasters (opens a new window), which increased insurers’ general calls for rate corrections.
While not all companies have been directly affected by the aforementioned events, most are now feeling the impact of these events on the D&O insurance market. Insurers are seeking to re-balance their risks, so most D&O policyholders are experiencing a combination of the following changes:
Insurers are applying more underwriting scrutiny, particularly after recent high-profile insolvency events.
“Managed” (i.e. reduced) capacity,
Imposition of sub-limits and/or exclusionary language, in some cases.
Companies that have had D&O claims are particularly feeling the effects of these changes.
The number of traditional, primary D&O insurance markets for large risks with multinational presence is still limited. On the upside, there remains plenty of excess capacity, but not always at the competitive levels we’ve seen over the past few years.
Insurers are applying more underwriting scrutiny than before, particularly after recent high-profile insolvency events. There will be greater focus on the financial strength of the company, debt maturity and future strategies as well corporate governance and anti-bribery and corruption controls.
This year’s D&O insurance renewal process is likely to take longer than before.
Insurers have implemented internal referral processes and checklists, which might mean that renewals take longer to complete. For example, there might be an extra level of underwriting sign-off for risks with US exposures or that are over a certain size, or insurers might look to purchase facultative reinsurance.
This year’s D&O insurance renewal process is likely to take longer than before, particularly if the incumbent insurer’s terms are not acceptable for any reason and other options need to be sought.
It is vital that your broker understands insurers’ individual underwriting positions, and ensures that any major issues (such as a profits warning or restructuring) are flagged at an early stage.
For this to be achieved, it is advisable to engage with your broker’s D&O team as early as possible and to follow our ‘10 steps to a successful D&O renewal’, as outlined here (opens a new window).
For more information, please contact Michael Lea on: