Tim Evershed reports on the rapidly hardening directors and officers market
The past year has seen the cost of liability insurance for company directors climb dramatically, to the point where it could become unaffordable, as a perfect storm of factors has hardened the insurance market at an unprecedented pace.
According to brokers, the average cost of financial and professional insurance has increased 90% during the last
12 months, while directors and officers (D&O) cover has witnessed triple-digit increases in some cases.
The increase in rates has been driven by the coronavirus pandemic, rising insolvencies, fear over new regulation and corrections after a long soft market. The increases have sparked fear among businesses that cover will become unaffordable, with the Institute of Directors making its concerns known to the UK government. However, insurers say the situation has been developing for some time.
“It is very claims-driven, it is not a kneejerk reaction at all – it is something that has been building up for a few years,” says Stefania Davi-Greer, regional head of financial lines, London at Allianz Global Corporate & Specialty (ACGS). “Suddenly, we all found ourselves in a place where the claims and the way we were writing accounts was not sustainable and we want to be sustainable for our customers.
“A lot of insurers have started looking at books where they had high-risk areas, such as books where they had US solicitor accounts or pharmaceutical industry accounts, and these areas have been targeted for remediation. However, within those niches it is always possible to find solutions and that is what we try to do with our broker partners and with our customers.”
The uncertainty of Covid-19 was magnified by the aftermath of the US elections. These issues have combined with other factors to create conditions unsustainable for the D&O market.
Mitch McBain, head of London broking, finex, D&O at Willis Towers Watson, says: “It was coming but nobody expected or forecasted such a significant shift. What has driven the hard market is fundamentally incorrect pricing from the London carriers for a sustained period. D&O claims are slow to develop and insurers, when looking at prior years, have seen that their books on those underwriting years were unprofitable.
“The primary driver for significant losses into the London market are securities class actions brought in the US for companies that have a US listing. Australia has been a hotbed of litigation for a number of years and that has had a significant negative impact on the London market.”
What has driven the hard market is fundamentally incorrect pricing from the London carriers for a sustained period. D&O claims are slow to develop and insurers, when looking at prior years, have seen that their books on those underwriting years were unprofitable
Mr McBain says the hardening market has created a steep learning curve for brokers as they tried to gauge how carriers would proceed, from the tail end of 2019 through last year and into 2021.
He adds: “They were fundamentally changing their appetite, pulling back capacity and non-renewing. That was accelerated by the Covid-19 lockdown and the uncertainty that brought.
“Brokers have been working with insurers to become much more aware of appetites or areas of restriction, whether it be the industry sectors, listing exposures or territories of operations. This then gives a clearer route to market when presenting a risk than we had 12 months ago. That means we can talk to our clients earlier about their 2021 renewals.
Mr McBain concludes: “We are cautiously optimistic about the state of the market for 2021. It is still a hard market and we are still expecting rate increases, certainly in the first part of 2021, but we expect a more consistent approach from carriers because they have done a lot of the realignment of their appetites and strategies last year. New entrants to the market will hopefully drive competition.”
Engaging with clients
In the meantime, brokers and insurers alike must search for ways to engage with their clients, explain what is driving rate increases, find out what clients want to achieve from their D&O renewal and help them secure the best possible coverage.
Ms Davi-Greer says this has meant tough conversations between insurers and insureds, but that partnerships have actually grown stronger due to these conversations.
She adds: “That is the value of what has happened, despite all the complexity and the challenges it has brought.
“When we speak to clients in this context, the key point to stress is really being transparent and being able to share information. That will really help us differentiate them from their peers, which is what customers should be looking for at this point – why they are different from others and should have different terms and conditions. It is not just a price-driven conversation.
“It has been a bit of a reality shift because a lot of people in the market have only ever seen a soft market and now, for the past two or three years, it has really challenged us because price is not the only conversation.”
She concludes: “Clients really need to engage with their insurers and their brokers and build on that partnership bridge. They need to make sure they are sharing the information that is required and can be clear about their needs. It sounds logical but often gets lost in the conversation.”
Tim Evershed is a freelance journalist