As claims related to the economic fallout from the pandemic emerge in the Directors & Officers (D&O) liability insurance segment, insurers can expect the claims to take several years to pay out and underwriting losses to continue over the near term.
Pricing changes are supportive of improving profitability post-pandemic, but this will depend on the path of the economic recovery.
According to Fitch, insurers with exposure to D&O underwriting are typically larger multiline insurers that can absorb or offset potential losses with results from other segments. At the end of 2019, the 10 largest D&O underwriters held a combined 67% share of all direct statutory premiums, and only 37 individual organizations wrote greater than $10 million of D&O direct premiums. Τhis market segment is rapidly becoming short on the supply side!
In 2019, Woodruff Sawyer forecasted the rise of D&O premiums – the first increase in nearly 10 years – and predicted this would continue on into 2020 and beyond. Today, that rise shows no sign of decline as record settlements, corporate bankruptcies, and COVID-19 continue to impact an already difficult market. Adding fuel to the hard market fire are potential future losses from a large number of open securities class actions, currently over 600 cases.
Favorable accounts record price increases of 10-30% are fairly standard, while the average price increase among the FTSE 350 policyholders stands at 195%! Despite renewal rate pricing skyrocketing, results remain under pressure with the direct incurred loss ratio rising to 62% in the first half of 2020, being the highest midyear level in 10 years.
The pandemic represents a potential for D&O claims including allegations against leadership of companies experiencing shareholder value declines or insolvencies from the economic fallout of the pandemic. Directors and Officers making decisions and releasing public statements about a future more beyond their knowledge and control than usual, is another area of concern. If things don’t go as planned, the bets made and risks disclosed will inevitably be challenged in court by disappointed shareholder plaintiffs. Organizations that failed to protect employees or customers from exposure to the virus or serious illness could also face claims as could businesses creating protective products or vaccines.
An already hardening D&O insurance market is becoming even tougher for buyers during the COVID-19 pandemic, with rates increasing further, available limits contracting, retentions rising and in some cases additional exclusions being inserted. For example, some insurers are also introducing COVID-19 exclusions into their coverage.
Unfortunately, this hardening market trend will continue in 2021.
As a result of the above more policyholders are exploring captives, trusts and integrated risk programs. Many point to Tesla Inc. CEO Elon Musk’s announcement that the company would not renew its D&O coverage but that he would personally indemnify Tesla instead. However, it’s probably impractical – or impossible – for the vast majority of companies to self-insure.
More broadly, insureds are beginning to change the structure of their D&O programs in response to the hard market.
Climbing Mount Everest, you need a Sherpa: a local who has climbed the mountain before and knows the territory well.
The services of an experienced and well-informed risk adviser are absolutely vital in negotiating and procuring D&O coverage. Risk advisers who have experience placing D&O policies should know what insurers are willing to offer and at what price, and how far one might be able to push insurers in negotiations over terms and conditions in light of the dynamics of the current D&O market.
For policy and renewal negotiations to be successful, clients should start the process early, in order to provide plenty of time to evaluate current coverage, identify gaps or concerns in coverage, assess their current liability exposures, taking into account any business plans that might impact liability risks, and then give their risk adviser enough time to negotiate with several insurers to obtain the most favorable prices and coverage enhancements available. This process can take months, not weeks or days. An insurer who knows that the expiration date on the client’s current D&O policy is imminent will be much less motivated to engage in negotiations over coverage enhancements.
Developing early on a strategic plan that assesses your unique risk factors and goals (e.g., cost savings, retentions, claims resolution) is essential and should serve as the lodestar for the difficult decisions and potential compromises that lie ahead.
A best qualified risk adviser can help you get the right D&O insurance program to provide your Directors and Officers with the financial backstop they need to be confident when making critical business decisions in an increasingly uncertain environment.