Speaking during an on-demand webinar during Day One of Airmic Fest, experts from Lockton and Chubb discussed the rapidly hardening directors & officers (D&O) insurance market and the challenges this presents insurance buyers

Tuesday 22 September 2020

11:30: Session: D&O: Navigating the ‘perfect storm’

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D&O insurance pricing was increasing well before the COVID-crisis, driven by worsening loss experience and restricted coverage - particularly in the US and Australian markets. Faced with such a challenging market, the workshop considered what practical steps could be taken to smooth the path to policy renewal.

Janet Edey, management liability manager UK and Ireland at Chubb noted the industry was experiencing challenging times, which “had not been made any easier” by the impact of COVID on the economy.

“Prior to this time, there had been a 16-year fall in D&O premiums, a gradual expansion of D&O cover over time and - just for a triple whammy - a rise in claims as well,” she said.

“It was no longer US-exposed companies dominating the large losses. The steepest increase in claims was for public companies without securities traded on US exchanges. So this triple whammy meant that insurers found that from around 2018 onwards, more premium was need to cover the exposure on their D&O books of business.

Factors driving securities class actions have also contributed to rising D&O claims, including the expansion of litigation funders within some markets, public sentiment surrounding issues such as climate change and diversity & inclusion as well as heightened regulatory scrutiny.

“At this point I thought I’d seen it all,” she added. “And then unfortunately we get the pandemic. None of us could have anticipated this happening and frankly it has hit us all between the eyes and exacerbated the pre-pandemic hard market.”

Despite the growing costs associated with the coverage, the need for D&O insurance has not diminished. With the global economy heading into recession Edey acknowledged this would translate into more legal actions against company directors & officers. This is what is creating the ‘perfect storm’ within the D&O sector. 

It is not all doom and gloom for risk and insurance managers, however, noted Michael Lea, a management liability executive at Lockton.

He described the Side A, B and C structure of D&O policies and explained this could enable insurance buyers to prioritise or ringfence limits such that they give companies the dedicated protection they need while also matching budgetary constraints.

“There are ways you can use your A side, B side, C side cover in order to tailor the coverage you buy and manage the cost of it,” said Lea. “For claims where the entity itself has been alleged to have breached securities laws, side C claims, it is possible to retain that or even co-insure it.” 

“What we are seeing in certain circumstances at the moment is a 25% co-insurance which is applied to Side C claims and that is one area where you will get a pretty good reduction in premium for US listed companies to do that. This is one area where the insurer will give you a technical reduction in their rate if you are prepared to retain either the entity or the indemnification (reimbursement) risk.”

Captive insurers are another option in a hard market, allowing corporates can self-insure their side C exposures and only transfer the non-indemnifiable (side A) exposures to private insurers, explained Lea.

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