The UK market is facing a D&O dilemma - the industry’s reaction will define the class’s future

Prices for directors and officers liability insurance (D&O) are increasing significantly as underwriters look to protect against a rising tide of claims and remedy the mistakes of the past.

There have been complaints from the business community that insurers are enforcing blanket increases across the board rather than taking a case by case approach. However, this has been denied by underwriters who say that the premiums charged are commensurate with the exposures.

James Whitaker, partner in the London office at international law firm Mayer Brown, said: “In the current febrile political and legal climate, senior managers - regardless of the size, sector or geographical reach of their organisations - find themselves under more scrutiny than ever before.

”The ever-increasing exposures faced by directors and officers, in both domestic and international contexts, have led to the recent well-documented hardening of the D&O insurance market, which has seen a mixture of significantly increased premiums being sought in exchange for significantly reduced coverage, usually with far higher retentions, [and] some prominent participants considering whether to continue writing D&O lines.

“The harder market is bad news for directors and officers, [who are] increasingly facing the prospect of personal liability in respect of civil and criminal claims, as well as regulatory investigations in a challenging economic environment, including as a result of increasing shareholder activism and domestic securities claims, the uptick in event-based litigation arising from social and environmental issues and, of course, the explosion of cyber events.”

Higher premiums

The rise in employee and shareholder rights have prompted many to take their grievances to court. The growth of the Me Too movement and a focus on diversity in the workplace has seen a significant uptick in claims against company management over bias and workplace culture.

Richard Salvini, member of the Forum of Insurance Lawyers (FOIL) and partner at Plexus Law, said: “Regulatory fines involving health and safety breaches have increased significantly over recent years and the impact of the Sentencing Guidelines has been widely reported. For example, the average levels of fine for large companies have increased to around £375,000 since February 2016. The cover for these cases are generally provided by liability policies.

“Therefore, the support provided to individual defendants through insurers and D&O policies is invaluable at a time when they require legal advice, support and guidance when they are feeling vulnerable and in an unfamiliar situation.”

The result has seen underwriters demanding significantly higher premiums as the number of claims and the value of awards has grown exponentially.

Swiss Re reported that UK financial lines premiums saw average increases of 15% in the second quarter of the year, driven by the rise in D&O premiums.

In its Global Insurance Market Index quarterly report, broker Marsh found that there has been a significant increase in pricing in the UK for D&O cover at renewal this year.

“Many clients experienced rate increases at or above 100%,” it said.

Cost acceleration

Adrian Jenner, head of cyber and D&O at Zurich Insurance, told Insurance Times that the market was at a pivotal point.

“The market is currently in transition, with rate starting to move towards levels last seen in the early 2000s as legal defence costs for growing regulatory actions, as well as actual claims, rise in frequency,” he said. “Insurers across the industry are looking to build sufficient premium funds to meet the growing costs.”

The drivers were varied, he added. “Awareness and take up of D&O cover in the UK is continuing to grow as new and more complex risks emerge. From new data protection laws to climate change, company executives face challenges on a number of fronts and having the right cover in place has become increasingly important.”

Jenner continued: “There certainly has been an abundance of capacity for the last seven or more years. Whilst we have only seen a few insurers exit the current D&O market, this continues to be a challenging environment for customers and providers. Certainly, those insurers still offering D&O terms may now have a more defined risk appetite or pricing parameters.”

Market adjustments

Meanwhile, Jacqueline McNamee, chief executive and founder at C-Quence, said the biggest issue has been that while the D&O market has changed, the industry’s approach has not.

“The issue for the industry is that we have two drivers of the market currently and they intersect,” she explained. “The first is around the insurers’ products and processes and the second is the impact of the evolving environment in which business now operates.”

She added that in the past, the market had been guilty of under pricing the risks they wrote and, as such, when claims arrived they burned through the reserve allocations.

“We also saw a lot of free coverage and extensions placed within the policies, which simply added to the exposures,” said McNamee. “Many would offer low or no deductibles. In the past 20 years, little has changed; the industry operates without any access to structure data.”

She added: “Technology has changed a great deal in society and we are in an environment where information is passed so quickly. A single issue can become a significant problem where in the past it had not been the case.”

There is now a need for the market to become more agile in order to adapt to the changing risks and demand for cover.

“We need to move away from the broad brush approach, drive granulated underwriting and deliver clarity,” McNamee said. “Remove the frilly add ons that have been included [in] past policies, explain what is covered and what is excluded [so that] our client will understand what they are being charged.”