The increasing frequency and severity of claims has seen pricing shoot up for directors & officers (D&O) liability insurance, and for specialist brokers the market correction is making it more difficult to secure coverage for international firms

One of the biggest corrections currently underway in the commercial insurance market is happening in D&O. Commercial D&O and financial institutions with a US or Australian listing have seen the largest pricing increases, at or above 100% in some instances. More broadly, the market has seen double-digit rate increases, varying from account to account by size and industry sector.

According to Marsh’s data, over the first three quarters of 2019 D&O premiums have risen 75% on average, representing a range of between 30-40% and a staggering 600%. Craig Claughton, head of the Financial and Professional Services Practice (FINPRO) at Marsh, notes: “Over the last seven years, premiums have risen on average 250% and we do not see any signs of these increases slowing. In fact, some D&O programs now cover less than they used to, at greater cost.”

The onus is on brokers to secure coverage for their clients in what is an increasingly distressed market. “I don’t envy brokers their job at the moment, trying to manage their client’s expectations,” said Catherina MacCabe, international management liability focus group lead at Beazley. “It must be extremely difficult, because the market is changing so fast.”

“You can have a meeting with a client three months before renewal and tell them one thing but the market may have moved again by the time the renewal comes around,” she continued. “It is a very difficult message to deliver.”

In January, Beazley launched a flexible D&O product for non-US clients. It includes a ’Side A Difference in Conditions (DIC) policy to insure individuals when their company does not indemnify them. It kicks in when underlying D&O limits are exhausted.

The three sides of D&O


Side A: Provides coverage solely for the directors and officers. Side A is triggered if the company refuses or is unable to protect or indemnify its directors and officers. Side A coverage operates as personal asset protection.

Side B: Reimburses the company for costs it pays on behalf of a director or officer (typically legal defence costs, settlements, or judgments). Side B operates as balance sheet protection for the company’s obligation to indemnity its directors and officers.

Side C: Protects the company if it gets sued for a securities claim. Side C operates as balance sheet protection for the organisation’s own securities exposure.

 (source: Airmic D&O Guide 2018)

There is anticipation that demand for standalone Side A cover will increase as the pricing and availability of Side C (entity securities coverage) becomes more challenging.

D&O price increases are expected to continue for the foreseeable future for a number of reasons.

First off is the steady rise of claims frequency and severity, particularly in the US and Australia.

In the US, the growth of securities class actions is a well-documented trend, but what has changed is the nature of these lawsuits.

In a social media-driven era scrutiny has never been greater. Senior executives are being pursued over ‘event-driven’ claims, such as those linked to the #MeToo movement, climate change and cyber breaches.

“We’ve been asking ourselves whether the pressure that social media puts on regulators to investigate means that household name brands are more exposed to investigations and D&O claims than a big company with a name that nobody has ever heard of,” said MacCabe.

Coming down the line is the expectation of further litigation against pharmaceutical companies and their senior management stemming from the opioid addiction crisis in the US. Other hard-to-place accounts include initial public offerings - particularly those with a US listing - and unicorn companies, privately held startups that are valued at over $1bn, typically tech companies.

“Pricing for IPOs has increased by many multiples over the past 18 months and average retentions have increased ten-fold and more,” said Kelly Dworniczek, vice president, D&O at AXIS.

“Bio-pharmaceutical and technology companies are difficult to evaluate – as well as underwrite – because the majority are unprofitable, and the companies’ product is largely intangible property that is subject to intense competition and quick potential obsolescence. As such, biopharmaceutical and technology public companies generally represent very tough classes of business.”

In Australia, the fallout from the Royal Commission inquiry into misconduct in the financial services sector and an influx of litigation funders has resulted in a boom in class action lawsuits. D&O actions are somewhat easier to bring against individuals Down Under where there is no need to prove that directors knew they were acting with malicious intent.

Insurers pull back

D&O underwriters are grappling with the losses, particularly on international accounts, which were notoriously underpriced during the soft market and where one or two claims can have a disproportionate impact on profitability in smaller markets like Australia. Their reaction has been to withdraw capacity for large commercial D&O, reduce limits and increase rates on line, particularly for Side C (entity) cover.

In a globalised world, UK-based firms are not immune to the current trends. International companies are re-evaluating their exposure to US class action litigation following a ruling in Stoyas v Toshiba in 2018. The decision by the Ninth Circuit court to recognise OTC American Depositary Receipts (ADRs) as securities has paved the way for similar claims to be brought by US plaintiffs against directors of foreign companies.

Moreover, there is a recognition that D&O as a class of business has a longer tail than had been appreciated. Some cases stemming from the Global Financial Crisis are only now coming to trial and regulatory investigations can be extremely lengthy, depleting D&O coverage even where directors are subsequently acquitted. This was highlighted by in the probe into three ex-Barclays directors which collapsed in February after a seven-and-a-half year long probe by the Serious Fraud Office.

Unlike the Australian market, the need to prove a “controlling mind” has curbed the ability of prosecutors to pursue corporate criminals. However, mechanisms for collective redress have been put to the test in Europe and some US litigation funders have opened branches in the UK, anticipating the tort landscape will change.

There has been a market-wide pause as D&O insurers re-evaluate the nature of the underlying risk and grapple with their loss reserves. “The challenge has demanded that markets be intensely technical and agile in the current environment,” said Dworniczek. “Those markets that were able to pivot quickly and early in adopting in-depth technical strategies not only survived with the healthiest portfolios but are today able to take advantage of the biggest opportunities.”

“Coming off a soft market, brokers are being challenged with delivering difficult rate messages and are torn between securing the best price for their clients and building a tower with an established market,” she continues. “Clients, especially in the IPO D&O market, have to make tough decisions and are often purchasing far less coverage than expected or needed.”

Read more…Briefing:How bad could coronavirus claims get for insurers?

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