By starting early and equipping themselves with a few simple measures, companies can ensure their renewal goes smoothly.
The Directors’ and Officers’ liability (D&O) insurance market has seen many years of very low rates. With competition for business so high among insurers, rates have steadily declined since 2009. Recent trends and developments, however, have raised some questions as to whether these market conditions are sustainable.
The last year and a half has seen an unprecedented surge in securities class (opens a new window). Regulatory scrutiny has also increased, with greater cross-broader cooperation between different enforcement bodies and regulatory agencies resulting in more complex, protracted and complex lawsuits. This trend has been exacerbated by the growth in litigation funding (opens a new window), which has provided shareholders with more options to pursue recoveries against corporations and their senior management.
We have also seen some huge, systemic D&O insurance losses in the market.
We have also seen some huge, systemic D&O insurance losses in the market. For example, the Petrobras corruption scandal (opens a new window) was more far-reaching than many industry commentators expected – as well as entirely eroding Petrobras’s D&O limits, it spread to several other companies.
Then there are the macro-economic factors – in particular the $100bn-plus insurance losses (opens a new window) from the North American natural disasters, which increased insurers’ general calls for rate corrections.
The convergence of these factors may result in some upward pressure on D&O insurance rates in the next 6-12 months. By starting to consider renewals early and equipping yourself with the following measures, you can ensure your renewal goes smoothly:
1. Start early
For a major D&O programme, start strategising with your broker and collating renewal submission information at least three months before renewal. Identify countries where legally issued policies are required, as many are ‘cash before cover’.
Start collating renewal submission information at least three months before renewal.
2. Be transparent
Provide information to insurers in their preferred format, rather than just a copy of the latest investor relations presentation. For example, most insurers would like to see the share ownership of their client broken down by country of domicile of shareholder, type of shareholder (ie, individual or institutional), and type of share owned (ie, Nasdaq, ADR, GDR). And increasingly insurers are examining the controls surrounding data privacy.
3. Be compliant and succinct
Provide details of your compliance, with applicable corporate governance guidelines, in a succinct format. Also provide details of internal policies for revenue recognition, corporate communications and insider trading. This will help you avoid later questions and additional information requests from underwriters.
Identify your appetite for your own risk through retentions, coinsurance or exclusionary language.
4. Identify your risk appetite
Work with your broker to identify your appetite for your own risk through retentions, coinsurance or exclusionary language, and formulate an idea of what will constitute an acceptable renewal programme. This will help your broker to identify your ‘hot buttons’ before the placement is underway.
5. Choose capable individuals
This is just as important with potential insurers as it is with your broker. Satisfy yourself that the individuals working on your account have sufficient experience of operating in a harder market, and have strong relationships with the decision makers to whom the risk may ultimately be referred.
6. Time your renewal
Brokers and underwriters are extremely busy at the end of each calendar quarter. More work gets delegated to junior staff during these times. June and January should be avoided where possible, as underwriters and brokers are at full stretch. Most insurers will have their own reinsurance treaty renewals at this time, which may affect their certainty over what they are able to do, and cause some decision paralysis.
7. Use your relationships
It can make sense to use the same insurers who are involved on your property and casualty placements where possible, in order to secure visibility and senior management involvement, as well as maximum leverage in negotiations. The strength and size of a corporate relationship will be taken into account in the underwriting process. No underwriter will want to attract their colleagues’ or management’s scrutiny, for being the one who lost one of their best clients.
A renewal presentation given to insurers by your senior management demonstrates how seriously your company regards the D&O policy.
8. Involve your C-Suite
A renewal presentation given to insurers by your senior management, ideally CEO or CFO, demonstrates how seriously your company regards the D&O policy, and enables underwriters to directly ask them questions. It also builds trust: this will be crucial later in the process when trying to get markets to release terms early enough for them to be carefully evaluated, and for the broker to obtain terms from alternative primary markets and/or excess layer markets.
9. Establish claims and service protocols
To reduce the risk of an actual claim becoming adversarial, it is crucial to have in place ‘best-practice’ protocols that clearly set out the responsibilities and expectations for both insured and insurer at the outset of the policy. Similarly, agreeing service protocols provides clarity about the expectation levels for response times, which will help to reduce potential conflicts.
10. Stick to agreed milestones
Allow time before renewal to get all capacity in place and policy wordings agreed. If a strict timeline is not adhered to, placements can lose momentum while insurers concentrate on more pressing issues. Or worse, you may be forced into rash decisions because the expiry of your current programme is fast approaching and things are behind schedule.
Purchasing broad protection for Directors has never been more important. Working closely with your broker well in advance of renewal will help you not only secure favourable renewal terms and conditions; it will also help you forge a partnership built on trust that will endure when company Directors and Officers need it most.