Pat Drinan, European liability manager, Ace European Group, says brokers have a role to play in selling D&O to SMEs
Directors' and officers' (D&O) liability has been available in the UK for almost 30 years, but had a slow start, accentuated by the corporate scandals in the 1980s and 1990s and subsequent litigation and legislation.
ACE estimates there are now 40,000 policies provided by 15 insurance companies across the UK, and that number is increasing in both providers and policyholders.
How do you underwrite D&O? Today it is better understood, but if it is not raised in conversation or raised as an uninsured exposure, the clients are not aware of its existence, let alone why they should purchase it.
It has traditionally been provided by specialist insurers with smaller broker panels, and so its distribution has been limited.
The premium for D&O is actually quite low for the SME segment, but then you've got to explain what it is to the end customer. The time involved to train your staff and time spent face-to-face with the end customer amounts to a premium of £700-£1,000. So the return maybe isn't there for that insurance broker to spend all the time and effort.
The market has been riddled with inefficient underwriting and distribution models. Specialist insurers responded to large accounts, they underwrote the large accounts that had US exposure and their business models centred around underwriting case-by-case.
More often, D&O policies are being sold to SMEs by insurance brokers, principally because the product has been 'demystified'.
The wording is in plain English and thousands of claims in the past 30 years have helped us clarify what that policy aims to do.
Regulation and litigation is scaring the SME market into looking for protection.
The pricing is more competitive, which is as a result of competition, but it's also more transparent.
Insurers entering the SME sector are realising that is delivered very differently. On large corporate accounts, insurers deal directly with the client and the broker in a tripartite fashion. Service is defined by the way you interact with that broker and client and how soon you respond.
But in terms of the return on equity, it's becoming a lot more favourable for brokers as the insurers understand that a different model is required for delivering to the SME market.
D&O liability insurance is protection for the personal net worth of directors and officers, and it's easy to get lost in this whole idea that this class involves thousands of submissions and policies to be bundled together to make it faster and more efficient.
When an insurance broker is placing the insurance - buying protection for a company's assets, the personal assets of the directors and officers in that company - the track record of that insurer is paramount. How long have they been writing SME?
You need to see some sort of commitment to this class, and see evidence of this in the marketplace. You need to know that the first claim you're going to present isn't the first claim the insurance company is seeing.
And in terms of claims, it isn't the same as dealing with a regular casualty policy, because the client gets very involved when it becomes a claim against the managing director or other company officers.
There's got to be a mutual win here or the insurance companies, the brokers, will not be involved in this. We manage the loss ratio, we look at the coverage. The insurance companies have got to help the insurance broker, and an insurance broker does have to take the time to train, to distribute.
Can D&O be sold to SMEs? It has been sold: there are 40,000 policies out there.
It can be sold through insurance brokers because we need a distribution channel that can explain this product to the end customer.
It needs to be provided by underwriters who understand the SME sector and are not taking a large company model and shoving it into the SME sector without first understanding it.
We heard earlier that 52% of SMEs prefer to purchase insurance by phone.
In fact, most of our insurance brokers are SMEs themselves and they also like to do business by phone. That realisation has a big effect on your business model, you need people at the other end of the phone who know what they're talking about.