Underwriters are ‘wary’ of claims against board members, therefore brokers must work to differentiate their clients’ risks

Despite the impact of Covid-19, directors and officers (D&O) are still bullish over their ability to continue to trade - but the market for D&O risks remains extremely challenging for clients and brokers alike.

In April, broker Willis Towers Watson (WTW) published its annual global D&O Survey 2021. This year, the biggest surprise within the results were the number of directors who believed that their firm was not at risk of insolvency or bankruptcy in the near future.

Plus, leaders across North America, Latin America, the UK, Europe and Asia Pacific cited the risk of cyber attacks and data breaches as their biggest concern, thanks to organisations’ increased vulnerability to data loss resulting from new business procedures and systems implemented overnight due to the Covid-19 pandemic.

Many directors suspected that remote working had created a fertile ground for cyber criminals.

The report further found that regulatory and litigation risk continues to challenge organisations, in particular now that board diversity is creeping up company agendas.

“Despite a year of unprecedented turmoil across the world as a result of the Covid-19 pandemic, the worldwide trend of increasing focus on director exposures has not let up,” the report stated.

“In England and Wales, we have seen a slew of new laws, regulations and consultations, from the Pensions Act 2021 to the FCA listing rule requiring a Task Force on Climate-related Financial Disclosures (TCFD) ‘comply or explain’ statement to be made by premium listed companies, to the UK government’s consultation regarding audit and governance, all of which impose or talk about imposing new obligations on directors.”

However, Angus Duncan, executive director for D&O risk at WTW, told Insurance Times that the main shock finding from this year’s research was around the number of directors and officers who viewed insolvency as a minor or negligible risk in the year ahead.

“I think the biggest surprise is the view around the threat of insolvency,” he explained.

“If you looked at the media in the past year, there was the expectation of a tsunami of insolvencies, but it is simply not reflected in the responses to our survey.”

When questioned, 63% of respondents said they saw the threat of insolvency as ‘not at all’ or ‘of minor significance’ for the year ahead.

“The concern had been for smaller companies, but for those with a turnover of £10m or less, 86% said insolvency was not a concern. Indeed, we were told that the level of insolvency had fallen in the past year. Whether we will see a rise in the coming months is unknown, but there does not seem to be any real concern at present,” Duncan explained.

’Nuclear option’

In terms of the continuing hard market, 71% of those surveyed said they were aware of the hardening market and 64% have seen an increase in their premiums in the past year as a result.

The study stated: “The D&O insurance market has already undergone a period of ‘correction’ with insurers seeking premium increases across the board in order to try and balance their books.

“Some insurers have even taken the ‘nuclear’ option and have stopped writing D&O business entirely. Meanwhile the emergence of cyber, environmental, social and governance (ESG) and reputational risks are all on board agendas - the impact on future claims trends will be concerning Insurers too.”

As prices rise, new capacity is entering the market, however.

“We are seeing quite a lot of new entrants, some of which are in the primary layers, although the majority is looking at the excess layers,” added Duncan.

“It is providing some relief to the pressure in the market. While we are not saying we will see flat renewals, it is likely those who were most affected by the hardening market may see smoother renewals in the coming year.”

Duncan added that brokers were still facing a challenge to replace the capacity which had been lost with the withdrawal of AXA XL, but that the influx of new capacity was welcome.

Uncomfortable conversations

While the report found some positivity in terms of rates, Duncan warned that the issues for directors and officers was not simply the cost of the cover.

“The hardening rates have been accompanied by changes in terms and conditions,” he explained.

“You may well think you have been able to source cheaper cover, but it may come with significant coverage restrictions and exclusions which leave you exposed to risks that in the past you would have expected to have been covered by your insurance.”

Sharon Brown, managing director of Harbour Underwriting, agreed that terms and conditions remain a concern for many.

“Many directors will choose or have no choice but to accept lower levels of indemnity and restricted cover in their D&O policies,” she added.

“This has been driven by a multitude of factors across the market as rates harden, capacity reduces and underwriters grow wary of a further rise in claims made against board members for decisions taken in response to the pandemic or due to insolvency.

“For brokers, explaining why premiums have almost doubled at renewal when the directors or core businesses may not have changed is an uncomfortable conversation.”

Duncan agreed that brokers have a real role to play on behalf of their clients.

“We have to be on our game,” he added. “In a hard market, the role of the broker is ever more important. We have to ensure that we properly differentiate out clients’ risks to the underwriters.”