Even ignoring this backdrop, which is rapidly evolving on a daily basis, as we noted in our October 2019 State of the Market Report, we did not expect market conditions to improve for the better in 2020. Unfortunately, that prediction has held true and, during Q1 2020, the Directors’ and Officers’ (D&O) and Crime insurance markets have remained difficult places in which to do business.
From our perspective, the market will only get tougher, as we continue to navigate through a very uncertain 2020. There are some signs of ‘new’ capital (i.e. no D&O legacy) becoming interested in writing business, with the D&O premiums being at historic highs.
Further deterioration in historical losses across the board1 , combined with heightened notifications on new claims, has led to a retraction of available 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 we believe that accessible available limits are around one sixth of where they were three years ago.
Resultantly, it is no surprise that insurers such as Axis, Vibe and Neon have stopped writing commercial management liability lines in London2.
COVID-19 has overshadowed all news sources and has caused turmoil in the financial markets. Undoubtedly, this overruling from the current global pandemic could result in further D&O claims, regardless of the industry or geography. Already we have seen two securities class actions resulting from the outbreak and how companies have responded and we expect to see many more.
The news of COVID-19 has disrupted businesses across the globe, causing widespread panic in industries and, according to the D&O Diary3 , a number of firms have issued statements updating their prior financial guidelines and warning all customers as to the expected disruptions that may affect their operating results.
The rate at which COVID-19 is developing poses numerous concerns for reporting companies. The virus has developed at a rapid rate, making it challenging for companies to assess the future outcome. At the same time, the message from the government is changing every day, along with the rapid evolution of the virus, causing uncertainty as to how long this will continue to impact business operations.
All of the above is amplified by the fact that certain industry sectors that were already under strain in 2019 now attract a whole new level of underwriter scrutiny. Almost overnight, the travel and leisure sector has become incredibly challenging to design D&O insurance programmes for, with exclusionary language already being applied and with requests for COVID-19 specific underwriting information.
This scrutiny is moving into other sectors - retail, financial, gambling etc. As the money stops flowing around the economy, we expect every sector to be affected in some way.
In 2019, US public companies saw consistent premium increases across the board, with the latter part of the year seeing more drastic increases. In addition to rate increases, most insurers have been looking to cut the capacity they had deployed and were enforcing higher retentions as well
There are multiple drivers behind this hardening US market – notably, continued inflated levels of securities class action lawsuits (at nearly double the 1997-2007 average of 203); a record litigation rate of 8.66% (nearly 3 times the historical average); the implications of the Cyan verdict (which has allowed securities actions to be brought, sometimes simultaneously, in State courts); increasing legal costs; along with a number of emerging trends, including ‘event driven’ litigation, the #metoo movement, as well as increased climate change, cybersecurity, privacy and data protection exposures.
The market segments hit particularly severely by litigation and D&O claims were the life sciences, pharmaceuticals and biotechnology sectors. Technology companies, in general, also saw very large increases (especially software companies), as did newer companies with only a brief interlude to an IPO (‘unicorn’ offerings) and reverse flow accounts (corporations with US listings, but domiciled outside of the US).
US private companies, on the whole, had a smoother 2019 renewal process, but were by no means unscathed. Almost all accounts are receiving a premium increase, but on a much lower scale. There continues to be capacity for these risks, both in London and the US but, as mentioned earlier, insurers are being more selective and are being careful to balance their books. Those accounts which are financially distressed, have claims, or are in a more challenged sector are now a lot more difficult to place.
Our expectations are that this will continue through 2020, with capacity continuing to be squeezed and more insurers exiting this space altogether.
At this point in time, there is almost no new capacity in London; but this may well change, with new insurers taking an opportunistic approach.
The D&O marketplace for ASX-traded risks continues to harden – both domestically and in London. This trend began around 18 to 24 months prior to the first signs of hardening in the UK and US markets and largely stems from the increased frequency and severity of D&O claims generally, but in particular, securities class action litigation.
This is driven by stringent continuous disclosure obligations on publicly-traded companies, an active regulatory and litigation environment, with well-established litigation funders and third party financers, as well as the rising costs involved in defending litigation.
This coincided with an oversupply of D&O insurance capacity, decreasing premium levels, as well as widening terms and conditions.
Some companies, who have seen the cost of their D&O insurance skyrocket (particularly the costs associated with coverage for securities claims against the entity), are opting to sub-limit their Side C limits or are dropping Side C cover altogether, exposing their balance sheets to such litigation, but also allowing them to reduce their premium spend and to preserve more limits for the individuals.
The average ASX securities class action costs between AUD 50m and AUD 70m to defend and settle, much of which is usually met by D&O insurers. The Australian D&O premium pool has been insufficient to pay for losses arising just out of securities class actions – not to mention non-securities related claims. Many of the insurers who have traditionally written ASX-traded D&O insurance will no longer consider low attachment points or, in some cases, no longer write this class of insurance. As the supply of capacity has dried up, insurance placements have become more challenging, restricted and expensive.
Increased rates (sometimes multiples of expiring levels) and retentions are, however, starting to attract interest from new entrants, as well as from insurers who traditionally have not focused on ASXtraded business and, therefore, do not have the tail of losses in the territory. Australian risks are seen by some insurers as a way to diversify books which have become heavily weighted towards US-traded risks in recent years, as the levels (and costs) of defending US litigation continue to rise.
Whilst we expect this new capacity to slow the rate of the premium increases in 2020 and do not expect to see premiums continue to multiply, until it is possible to generate significant competition (particularly on the primary and low excess layers) and for insurers of ASX-traded business to return to somewhere close to profitability, we do not expect rates to stabilise in the short or medium-term.
The UK D&O market has changed drastically in the last couple of years. We have seen increased volatility across all industries. Significant increases in all sectors continue across UK public, private and US traded firms, which is likely to continue.
The D&O landscape in the UK has been massively altered by increased class actions and changing legal and regulatory environments globally, emphasising the accountability and liability of directors and officers. Companies that used to be slightly shielded from claims exposure in other territories, despite purchasing multinational D&O programmes, are now having to take into account global claims trends. Even UK companies with shares traded in the US, regardless of being issued unsponsored ADRs, are now being heavily scrutinised by insurers.
In addition to all of this, the impact of COVID-19 has made travel and airline industry risks, to name just two, extremely difficult to place. We also expect to see a number of high-profile (as well as an even higher percentage of SME) insolvencies as a result of this virus, which may lead to future litigation.
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, with UK listed companies no longer being seen as ‘claims free’.
Europe has seen increased regulatory activity and, therefore, D&O claims. Traditionally, we have seen large limits from European insurers, but maximum line sizes are being cut and clients are now needing to build their programmes in more layers. This, also, has undoubtedly changed the litigation process – programmes historically built with one insurer taking the claims lead, now have group litigation handling becoming much more common.
The European D&O market began to harden around 12 months after the London market, meaning that European insurers became an increasingly viable option for clients who had previously had their whole programme placed with London insurers.
More European claims and investigations, combined with insurers becoming more joined-up internally, has meant that underwriting appetites and terms across insurers’ various offices are now more consistent. Having said that, our view is that accessing the continental European market is a valuable marketing exercise and provides diversification of insurers on programmes.
In South Africa, capacity is largely still available for locally listed companies and many programmes can be completed in the local market.
The shrinkage in capacity has not been as severe as elsewhere in the D&O marketplace. However, South African companies that are listed in the US need worldwide capacity to complete their programmes. The market in London for South African risks remains vibrant, although underwriters are increasingly more selective and are scrutinising the pricing and retention levels of any locally placed capacity.
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. The Crime insurance market is considerably smaller than the D&O market in terms of relative premium, but the regularity, size and difficulty of recent claims in this space has started to take its toll.
We are seeing two to three insurers are required on any given placement, regardless of the limit, and additionally some broker facilities are not being renewed.
Sompo insurance has recently joined a growing list of insurers that have withdrawn entirely from the Crime market, leaving the market short of primary insurers.
With only a small handful of options available and with insurers generally only keen to write on a co-insurance basis, most clients require each of these primary insurers 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. Also, with a lack of insurers willing to write Crime in isolation, as they become more selective on writing the D&O it’s likely to cause a negative knock-on effect to the Crime market.
It is also interesting how loss trends are cyclical in their nature. 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. There remains about GBP 20m to GBP 30m of available capacity for full social engineering cover, in our estimation, being risk-specific exposures are considered.
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 have 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 - it is currently close to impossible for insurers to write business on a zero claim basis. In the future, we expect that D&O and Crime underwriting strategies will be focused on securing a large and diverse enough book of business that covers all bases.
What can be done in the remainder of 2020 to mitigate this environment?
Our advice remains the same. The focus has to be in obtaining as much limit as practicable and trying to provide our clients with options, even if some of these are /relatively unpalatable.
- Risk profile: The key is proving your viability as a business first and foremost; then demonstrating a high level of corporate governance and risk management.
- 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. Do not 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 to them; those that understand the client’s risk profile and can work with them to achieve the best terms available. 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 suitable partners for you, as they should have noted any deterioration in underwriter behaviour on other client accounts.
- Programme design: Design of programmes must be creative - different retention structures, side-A only layers, ventilation, and changing the overarching structure can help. In addition, the use of small lines of GBP 1m-2m has become increasingly useful for very difficult placements.
- Worldwide marketing: The utilisation of the full gamut of international insurers may prove to 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.
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, with rate rises upon renewal, restrictions on coverage, additional exclusions (including, increasingly, restrictions around COVID-19 -related claims), and potentially rejected claims.
Those businesses that are renewing their programmes during Q2 2020 and into Q3 2020 will need to work closely with their insurance brokers and should take the following, important steps to ensure that they are 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 certain risks ‘up the chain’ to senior management or their boards. Push your brokers and insurers hard, gather your information in plenty of time, and expect insurers to ask more questions than usual.
- Consider personalities: as insurers become more selective, 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 are looking at all available options to secure your renewal. If there is 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.
Our advice has always been to for clients to engage early, be ready for very difficult renewals and 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.
- 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.