Unfortunately, that prediction has held, and as we approach the end of Q3 2019, the Directors’ and Officers’ (D&O) and Crime insurance markets remain difficult places in which to do business.
In our view, the market will continue to be difficult until the end of 2019, and into 2020. A further deterioration in historical losses across the board1 , 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, very recently, stopped writing commercial management liability lines in London2
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 and Crime 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 Q4 and Q1 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.
The outlook for the Crime market
The Crime insurance market is still suffering. Claims continue to come in thick and fast; they are considerable in quantum, losses are frequent, and rarely are they long-tail. This market is a fraction of the size of the much larger D&O market in terms of relative premium, this combination of regular, fairly chunky, difficult claims has taken its toll.
Sompo Insurance has recently joined an increasing long list of insurers that have withdrawn entirely from the Crime market, leaving the market short of primary carriers. With only a small handful available and insurers generally only keen to write on a co-insurance basis, most clients require each of these primary carriers to participate if a renewal is to complete. Sompo’s exit therefore has seen available capacity drop further. The excess Crime market, unlike the excess D&O market, is not much larger than its primary market.
It is also interesting how loss trends have a cyclical effect. Three or four years ago, as claims for employee dishonesty and employee theft were plateauing, social engineering was a hot topic that was being asked about at every renewal. These days, social engineering losses have just become another nail in the coffin for the Crime market. There still now only remains about GBP20m to GBP30m of available capacity for full social engineering cover. As companies began to focus and address risks of social engineering, their attention was diverted from more traditional loss categories, including employee dishonesty and employee theft. Now, we’ve seen an increase in these claims – and no dip in social engineering claims to offset this rise.
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. The world is becoming more litigious, and the claims are not exclusive to large or listed firms. The market has slowly come to this realisation and insurers are changing their strategy accordingly. In the future, we expect that D&O and Crime underwriting strategy will be focused on securing a large and diverse enough book of business in order to cover all bases.
What can be done in the remainder of 2019 to mitigate this environment?
Our advice from January 2019 still holds:
- Time: A three or four month lead time for renewal is highly advised. We cannot stress this point enough; insurers are referring risks right up their management chain, they want more time to review all information, they ask more questions. Don’t risk leaving your renewal too late.
- Insurer arbitrage: Not all insurer offices or individual underwriters behave in the same way. It is important that clients work with the best underwriters available; those that understand the client’s risk profile and can work with the client to achieve the best terms. Be wary of those underwriters that are being opportunistic, or those where service levels have dropped in recent months. Your broker will guide on which insurers are the best partners for you, as they will have noted any deterioration in underwriter behaviour on other client accounts.
- Game theory: In order to build significant programmes with the best possible terms and conditions, brokers must employ game theory strategies to leverage insurers whilst maximising competition and capacity.
- Programme design: Design of programmes must be creative; retentions, side-A only layers, ventilation, and changing the overarching structure can help. In addition, the use of small lines of GBP1m-2m has become increasingly useful for very difficult placements.
- Worldwide marketing: The utilisation of the full gamut of international insurers will be vital at renewal. European markets, plus those in the US and Bermuda can all provide options for clients as those markets have not hardened as quickly as London.
- Consider personalities: As insurers become choosier, so should you. Underwriters are all different; some individuals are more experienced and knowledgeable than others, some prefer some risks over others, or prefer to handle renewals in a particular way. Your broker will be able to advise you on the most suitable choices of underwriters and, crucially, will ensure that the selection is aligned to your requirements.
- Be flexible: We will ask you about new structures and programme designs to ensure we’re looking at all available options to secure your renewal. If there’s an option for greater utilisation of a captive, let’s discuss it. If you’re willing to take more risk on the balance sheet, let’s model it. As brokers we can develop the strategy – as a client, you just need to be ready to consider all the options.
Top tips for renewal
Since virtually every aspect of the Directors’ and Officers’ (D&O) market has been affected, from private companies through to the largest multinational, publically listed companies, renewals are still extremely challenging; rate rises upon renewal, restrictions on coverage, additional exclusions, and potentially rejected claims.
Those businesses that are renewing their programmes during Q4 2019 and into Q1 2020 will need to work closely with their insurance brokers, and take some important steps so they are best prepared:
- Go global: No stone must be left uncovered in the international hunt for available market capacity. Be flexible and ready to trade with new underwriters; all possible global capacity should be approached and all options sought out.
- Get in early: Our key piece of advice is to engage with your broker early. In a hard market insurers refer risks ‘up the chain’ to senior management or their boards, as they become more selective. Push your brokers and insurers hard, gather your information in plenty of time, and expect insurers to ask more questions than usual.
Our advice has always been to for clients to engage early, be ready for very difficult renewals, be prepared to be proactive and involved throughout the process. If we can consider all options up front, there will be more that we can do in terms of programme design, structure and choice of international markets.
Watch our latest market update from Managing Director, David Ritchie to hear about the key drivers shaping the Management Liability and Crime market, advice to mitigate challenging market conditions, as well as top tips for those coming up to renewal.
- The deterioration of past claims continues unabated, with underwriters posting higher and higher reserves on old claims that were previously assumed to be contained within primary layers.