D&O: opportunity or fairy tale?

Published on Thu, 10/12/2020 - 11:45
Julia Graham is Airmic's deputy CEO and technical director
Julia Graham is Airmic's deputy CEO and technical director

Author: Julia Graham, Airmic Deputy CEO and Technical Director

After a decade of complacent decreases in directors’ and officers’ liability (D&O) premium rates, the insurance industry woke up in 2019. There was no evidence of a malevolent fairy casting a spell on the industry at the start of the last decade - and no prince at the end of 2019 to wake insurers up - but there are similarities between the D&O insurance story and the tale of Sleeping Beauty. This article was originally posted in Insurance Post.

How has this scenario arisen? There is no single reason, but a heady cocktail: actual and predicted increases in class actions; the consequences of man-made and environmental disasters, corruption and cyber-attacks; political clouds gathering on the horizon, particularly in the US, the UK and Hong Kong; a gloomy global economic outlook; and the proliferation of metrics and models used by insurers to gauge D&O risks.

COVID-19 has increased the risk profile for insurers and insureds alike. Add to this, a continuous growth in legal, regulatory and reporting requirements, and D&O demands faced by boards are rocketing. Anxiety levels on both sides of the transaction have escalated. This should drive all parties in the transaction, insurers, brokers and insureds, closer together, but some of the strains introduced by COVID-19 on the efficiency of insurer processes have made this at times impossible.

Late renewal terms, often re-adjusted at short notice, are not a great example of the insurance market rising to the challenges and opportunities of technology, or of using a virtual business environment to conduct business during the pandemic.

Insureds are focusing on maintaining liquidity and the health of their people, with some industries facing unique circumstances. They are also confronting annual premium increases regularly in excess of 400%, compelled them to accept decreases in cover limits and to live with cover restrictions and a reduction in choice in the market, with insurers willing to underwrite these risks.

Failure to find cover at a price that organisations are willing and able to pay, insureds are turning to managing D&O as an emerging risk. However, techniques and controls for managing traditional risks may not be effective for managing risks that are emerging and evolving.

Insureds have to manage overheads. Insurance is an overhead. Budgets are often fixed and, as such, insurance budgets cannot flex to absorb insurers’ demands. Consequently, it is unsurprising that insureds are turning towards differentiating themselves from the D&O risk ‘pack’ to demonstrate excellence in managing risk.

Insurers should focus on the unique profile of insured risks each on their merits - or ‘individual underwriting’ - and a meeting of minds on managing risk and insurance or integrated risk management. The alternative is to drive insureds, as they grow their risk management confidence, towards increased use of alternative risk financing and greater levels of self-insurance.   

There is no prince to wake the insurance market up, but rather than making knee-jerk turns, there are opportunities that the market should seize by looking to the long term at the role of this business class in underpinning resilience for economic recovery as the pandemic starts to pass.

This month’s Space X flight to the International Space Station is named ‘Resilience’. Nasa has noted that “for the first time in history, there is a commercial capability from a private sector entity to safely and reliably transport people to space”. In a challenging world there are still initiatives that continue to amaze and excite. In comparison, it should not be rocket science for the insurance market to deliver innovative and realistic solutions for D&O risk.

This article was originally posted in Insurance Post.