State of the Market for Directors & Officers Liability Insurance (D&O)
In Gallagher’s State of the Market report published in February 2019, we wrote that we did not expect market conditions to improve for the better in 2019. Unfortunately, that prediction has held, and as we enter into Q1 2020, the Directors’ and Officers’ (D&O) insurance market remains a difficult place in which to do business.
Company directors and officers are under more scrutiny than ever before due to the increased levels of regulation around corporate behaviour and reporting. This is especially relevant for Life Sciences companies, as they rely on the support of investors who provide crucial funding for their projects and, therefore, need to make their business as appealing as possible. Plus, if an allegation is made against one of your senior employees, then you could be risking not just your business but also their own personal assets too.
What is Directors’ and Officers’ insurance?
D&O insurance is designed to help protect your business and its directors and officers from litigation that could arise out of their decisions. D&O not only protects the business against claims, it also protects the assets of individual directors and officers who can be held personally liable for their decisions by regulators, investors and shareholders. D&O allows your board to make decisions which are unrestricted by the risk of financial loss.
In our view, the market will continue to be difficult as we continue into 2020. A further deterioration in historical losses across the board, combined with heightened notifications on new claims has led to a further retraction of availability of capacity – making the renewal process more fraught as underwriters are even more selective about which risks they will consider. Limits are down and rates and retentions are up. We have seen uplifts ranging from between 10% to multiple times expiry premium, and accessible available limits are around one sixth of where they were three years ago. Axis has stopped writing commercial management liability lines in London, with other carriers likely to follow suit.
It is also clear that some industries and sectors are being harder hit than others by this new level of underwriter scrutiny and selectivity. In addition, in terms of percentage rises on rate, non-listed US companies are being impacted more than US listed companies - even though it is this class that are experiencing the larger, more substantial losses. It’s all to do with the premium base. A US listed who paid USD1m in premium last year probably will now be paying circa USD1.5m, yet American firms which are not publicly listed are often seeing much higher percentage increases. This is due to global litigation increasing outside the USA. These days it is close to impossible for insurers to write business on a zero claim basis.
The world is becoming more litigious, and the claims are not exclusive to large or listed firms. Since the market has slowly come to this realisation, insurers are changing their strategy accordingly. In the future, the D&O market underwriting strategy will be focused on securing a large and diverse enough book of business in order to cover all bases.
As the year marches on, capacity levels will decrease further as underwriters fill their budgets earlier than in prior years, leading to less competition, and even higher pricing. As such, those approaching renewal in Q1 and Q2 2020 must do so early and must be willing to approach the process with a greater degree of flexibility than they may be used to, in order to avoid a risk of programmes failing to renew, or being forced to self-insure more than firms desire.
On account of rising global litigation - and increasingly outside of the US market - nowadays it is close to impossible for insurers to write business on a zero claim basis. In the future, we expect that D&O underwriting strategy will be focused on securing a large and diverse enough book of business in order to cover all bases.
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