D&O premiums head skyward

by Resolve Editor Kate Tilley

Directors & officers’ liability premiums are skyrocketing and some insurance buyers are dropping side C coverage and/or agreeing to larger deductibles.

A panel of experts, led by moderator Andrew McKenzie, director, specialities, northern region, for Aon, delved into the D&O market’s drivers during the AILA Queensland insurance law intensive, Walking in another’s shoes.
 
Nigel Jones, manager, insurance, Aurizon, said, as Australia’s largest rail freight operator and a top-100 ASX company, Aurizon was a major corporate buyer. “Increases are inevitable and unpalatable, but we understand we need a sustainable insurance industry which must make reasonable profits,” he told the session.

D&O costs had risen from about 2.5% of Aurizon’s premium spend in 2015 to 20%-25%. “There’s an affordability crisis, because we have finite resources. Some [insureds] are slashing the amount of cover or opting not to insure side C because it’s not affordable. I hope there’ll be a softening soon,” he said.

Marie Hughes, manager, insurance, Virgin Australia, agreed D&O was “difficult”. Her biggest role was to ensure the board was fully informed about the market, their risks and how claims could be made against them personally and the entity.

Helen Brand, assistant vice-president, Liberty Specialty Markets, said the underwriting process hadn’t changed. But the lack of capacity meant brokers and their clients had to be more specific in client presentations. “It’s not just ticking boxes. They must explain themselves and develop a relationship with us, that way shock increases will not be as intense. The green shoots are a stabilising rather than a softening in the market.”

Robin Cooper-Driver, head of long-tail lines, Asia Pacific, for Zurich Financial Services Australia, was blunt, saying “mathematically, D&O doesn’t work in Australia”.

“Can we meet expected return on capital in this class? If we can get the settings right with premium sufficiency, you can get equilibrium. We don’t know how to pick the good and bad risks. I expect size is relevant, bigger [companies] are easier to sue. Board tenure is important. Should boards buy side C? It’s an anomaly and the insurance industry has created a rod for its own back.”

Nigel Jones agreed, saying “side C was an add-on that insurers probably now regret. It will become unaffordable and insurers will stop offering it. Client retentions are big.” He queried whether having side C cover actually attracted class actions.
Ms Brand said there had been a reduction in towers of up to $200 million, more client co-insurance, bigger deductibles and more self-insurance through captives. “For clients that used to buy side C, we haven’t seen a substantial drop in price, only 10%-20% reductions when they drop side C.”

Ms Hughes said only a brave risk manager who would tell a board not to buy side C. “I wouldn’t do it. You have to outline the risk-reward of side C. There’s a shift into A and B only, but that doesn’t prevent actions against you. [Virgin has] had a lively discussion about side C because we have moved from being ASX listed to a private company. I talk to the board about other coverages that can protect them. Removing side C doesn’t remove the claims risk.”

Mr McKenzie said there was a dramatic drop in side C purchases but even A alone was still expensive.

Mr Jones’s advice to insureds was to “work your broker hard, they’ve had it easy in a soft market, when they were more of a postal service.

“You need a strategic thinker. It starts with early engagement with the board and executives. Get the broker in on board presentations, get a strong tripartite relationship going with the insurer. You don’t want to swap and change too much, you want stability with an insurer, especially in a limited capacity environment.”

He suggested tailoring insurer presentations to show how the company managed continuous disclosure and environmental, social and corporate governance obligations. “You must articulate how you will achieve your targets.”

Ms Hughes agreed on the importance of forming relationships with the insurer and the broker. “I like my broker to frighten my board, so I am not the bad guy.” She favoured face to face rather than virtual presentations, when it was “harder to get your point across”.

Ms Brand said insurers could source financial information about companies but wanted to know about the people, the culture, underlying features, how companies supported employees and what their cash projections were. “We want to get under the covers and know more about you.”

She said many companies struggled to keep up with “what’s coming at them”, with greater scrutiny of financial projections, continuous disclosure, and other issues “regulators are jumping on”.

Mr Cooper-Driver said a more aggressive regulator created more claims, but some reforms were long overdue.

Mr McKenzie raised D&O implications of the rise in cyber attacks.

Ms Brand said it was broader than just a D&O issue. “Insurers have created the beast of cyber and it could be catastrophic across all lines of business. Policy terms & conditions are quite broad; it’s a big concern. Cyber exclusions are popping up in D&O, reacting to silence in other policies.”
Mr Cooper-Driver agreed, saying cyber was a real risk and should be at the top of directors’ minds. He, too, was worried about silent cyber cover in other policies.

Ms Hughes said insureds needed to understand what was and wasn’t covered. “It might be money for jam for insurers because of the exclusions.”

Mr Jones predicted cyber cover could “go the same way as D&O”. “Insurers will lose money and we’ll see premiums go up.”

Some insurers were refusing to cover ransom payments and others were considering the legal and moral obligations of doing so.

Ms Hughes summed it up: “There’s no one solution, it’s an ever-changing market.”