Market update, D&O Insurance: Hardening like cement
- All public companies; resources, construction, finance sector participants
- Directors / senior management
Directors & Officers Insurance (D&O) is heading for a crisis point in Australia. Insurers participating in D&O have written this class at or close to a loss for the last 6 years – and not just some small anomaly losses against solid actuarial data. A 60% gross loss ratio (GLR) – (which is generally premium collected v claims paid and reserved) – is the target required to make money on this class of insurance.
Estimates place GLR’s at between 100%-215% on insurer D&O portfolios over the last 6 years.
So, why would they do this to themselves? The answer, in its most overly simplistic form, relates to the macro-economics of how insurers make money; and D&O has little influence on this equation.
Capital floods into insurance markets seeking returns
Benign period of loss on catastrophe classes (property)
Insurer returns increase on investing premiums
Grab for market share by soft underwriting approach
Now, conversely, the opposite is happening.
Capital withdrawn for better returns elsewhere
Significant losses on catastrophe classes
Return to underwriting discipline and harder overall market conditions.
So why is my D&O policy being hit so hard?
It’s worthwhile noting that property insurance is also showing strong signs of a correction, as well as some areas of the liability and professional indemnity space – but nowhere near to the extent of D&O despite D&O being a tiny drop in the overall global premium / claims bucket.
The current GLR is the key element, but not the kicker moving forward for this class.
Class Actions: D&O
Increased class actions bought against corporations over the last 5 years (averaging around $300M in settlements per annum) in addition to further legislative changes have opened the way for plaintiff law firms to pursue broader types of class actions (consumer, public interest, natural perils, worker exploitation) in more states throughout Australia – making us one of the most favourable jurisdictions to lodge such a suit (behind the US of course).
Capacity and coverage drying up
As access to easy capital exits the insurance market, insurers are no longer accepting portfolio’s that are underperforming. As overall return on investment diminishes, each division needs to be profitable in its own right – D&O is front and centre as it represents the largest claw back opportunity through underperformance.
It starts with ‘Side C’ cover – that section within the D&O policy that protects the entity itself from claims arising out of the securities (shares) of the company. Insurers are either not offering this cover on renewal or are limiting their exposure to this ‘Side’ by considerably reducing the limits they extend while imposing substantial excess structures.
Securities claims, insolvency exclusions, restrictions on debt/equity raisings, withdrawal of capital/finance backing exclusions, tighter major shareholder exclusions, higher attachment points (i.e. not participating on primary layers) and reducing overall limits are the key areas of focus for insurers to trim cover and exposure.
Most insurers’ strategies appear to be broadly based on trying to grow profitability through shrinking their portfolios and risk attachments.
What does it mean to you?
It means that risk and audit committees, senior management and boards overall are now in a position of not being able to fully transfer many of the management risks that they could before. Insurers are hardening with startling rapidity on excess structures, capacity and, of course, pricing.
There is still flexibility in the market, but only if the right messages are communicated – strategies are needed to demonstrate to insurers that the D&O risk is being properly considered and mitigated.
Just rolling over the D&O on renewal is no longer an option and directors should themselves personally engage with senior management to ensure that proper strategies are being employed to reduce the impact on coverage and premium.
Insurer selection, transparency, relationship management and conveying your individual risk profile personally is critical in helping to mitigate / curb these prevailing market issues and assist your company to stand apart during this market correction.
– Adam Battista, Allegiant IRS
– Brad Russell, Allegiant IRS