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How is the world of D&O insurance changing?

At a glance

  • For 10 years risk managers will have been used to negotiating D&O renewals knowing that the coverage would have regular premium reductions and coverage enhancements
  • However, this has changed in the last 12 months, leaving many who have sought to renew D&O cover somewhat shocked
  • We look at what brokers and clients can do to differentiate themselves in a challenging market.

This article counts towards accumulating your annual CII CPD structured learning hours for Workforce and Emerging Risks.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Summarise some of the steps employers can take to reduce the risk of employers’ liability claims and/or identify the insurance implications of different emerging risks.

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What is D&O insurance and who does it cover?

Directors, managers and employees are all subject to various duties and standards in the performance of their roles. These can range from simply acting in the best interests of the organisation, to complying with strict legal and regulatory standards.

If an individual falls short of their obligations they can be held personally liable via civil, criminal or regulatory proceedings.

Directors’ & Officers’ insurance (D&O) protects these individuals, covering the costs of defending allegations made against them and reimbursing associated fines and penalties.

Modern policies also typically include certain protection for the organisation itself, as well a range of optional covers.

What are the benefits of having D&O insurance?

Every organisation can benefit from D&O insurance, regardless of its size or legal status. Every director and officer faces various duties in the performance of their role, and each is vulnerable to potential allegations of wrongful conduct.

Smaller organisations may arguably gain the greatest relative benefit from D&O cover, as they typically have fewer resources to defend allegations or fund potential fines, penalties or awards for damages. Despite this, many small and medium enterprises still fail to appreciate the importance of D&O cover in today’s marketplace.

D&O can also prove to be a valuable part in a company’s corporate governance or risk management strategies. Especially as the trend of greater individual accountability has made D&O insurance more relevant than ever for today’s business.

How has the D&O market changed?

For 10 years risk managers will have been used to negotiating D&O renewals knowing that the coverage would have regular premium reductions and coverage enhancements. They will have been confident that the policy was:

  • Fit for purpose for the Company and its D&O’s
  • Providing predictable savings
  • Including policy limits that reflected peer review benchmarking.

However, this has changed in the last 12 months, leaving many who have sought to renew D&O cover somewhat shocked. The messages from Brokers and Insurers now focus on the changing appetite for D&O risk.

The UK D&O Insurance market has been a competitive space for over 15 years, with regular new entrants from Lloyd’s Syndicates, Insurance Companies and MGA’s. Additionally, many of the major brokers have created specific facilities and own-labelled policy wordings for their clients. However, with reductions of excess estimated at 50% over the last decade and an increased frequency in D&O related payments and liability settlements, insurers have awoken to the lack of reserves and inadequate pricing to meet future claims.

So far 2019 has only seen a small number of insurers leave the D&O market as a whole. Yet many are withdrawing at a pace from certain industries or sectors such as Pharmaceutical, Bio Techs and Mining as a result of the continued losses. It would appear that across the remainder of 2019 and certainly into 2020 D&O will become a very challenging place to be for insurers, clients and brokers.

It is therefore becoming more important for brokers to differentiate between the long-term insurer partners and insurers who are yet to take adequate reserving to their portfolios, as they may heighten the uncertainty for the buyers and their boards over the next renewal cycle.

For more information on the issues discussed in this article, please get in touch with your local Zurich contact.

What can clients and brokers do to differentiate themselves in a challenging market?

  • Start early: If the clients engage with brokers as easy as possible this means they can ensure their broker has the right knowledge of their business and risk. The broker can translate this to current and prospective insurers to reach the best outcome.
  • Strategy: Setting a strategy in place and agreeing key objectives ensures both client and broker are clear of the priority outcomes.
  • Ask questions: Clients must make sure they understand from the broker and/or insurers key concerns, topics or questions they may have for the renewal. If you have questions or concerns make sure they are raised and that all parties understand the answers.
  • Presenting risk: Agree how best to present client’s risk. For example, is involvement from members of the Board, Senior Management, Legal or others within the business needed or additional information required to submit with the renewal?
  • Meet insurers: Meeting with key insurers can help clients and brokers to understand their challenges and needs to address risk. This may require one to one meetings and not necessarily one group meeting.
  • Investor Days: During investor days give consideration to inviting key Insurers so they can get a deeper dive or insight into the operational controls and senior management.
  • Review: Make sure that the internal risk appetite for self-insured retentions is reviewed.
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