Whilst some new capacity is beginning to enter the market, in our experience the increased supply is not yet having much of an impact on an average renewal. So what can a business do to give itself the best chance of obtaining the cover it needs at an acceptable price?
Factors influencing renewal
Gallagher’s State of the Market report for D&O published in January 2021 focussed on the two factors which influence the availability and cost of insurance coverage. Whilst businesses probably can’t do much to affect the first of these, they should be able to take steps to impact the second:
The first factor: underwriting pricing and capacity (“market risk”)
Policyholders can’t influence the amount of underwriting capacity available in the market. That’s dependent on:
- market capitalisation – if insurers exit the market e.g. because claims they’ve paid have outstripped premiums they’ve received, those remaining will demand higher prices for the capital they have available
- market premium levels – higher premiums normally attract fresh capacity from new insurers who aren’t impacted by historic claims or other legacy issues
- industry sector – insurers will be cautious in the capacity they’re prepared to provide to policyholders operating in certain sectors
The second factor: features of the risk itself (“company risks”)
How attractive a policyholder appears to potential insurers will be influenced by a number of factors which arguably are within that organisation’s control.
Financial stability – this is critical, as solvency is a material risk factor for insurers. If a company has public debt, the insurers will analyse this measure against the company’s peers. They will also look at liquidity, cash positions, leverage and debt maturity when measuring risk.
Inevitably, financially stronger businesses will be more attractive to insurers.
COVID-19 response and resilience – insurers will also consider how a policyholder has responded to the COVID-19 pandemic. Some companies and their directors and officers may be criticised for their handling of the crisis by stakeholders and may face litigation for the perceived ‘mismanagement’ of their company during the crisis.
Examples include:
- decisions about when or how the business managed employee or customer safety
- how the company communicated to customers or shareholders
- how the business failed to be compliant with rules, regulations or laws
Insurers will look to provide capacity to organisations which can demonstrate and document how they took decisions and show they took the best course of action based on the information available at the time.
Corporate governance – It’s vital to have effective controls in place to reduce insurers’ concerns over the potential frequency and severity of claims. Entities that are well managed, with excellent corporate governance, will have the best results in a difficult market.
US exposure – Not a factor for all UK entities, but US exposure is a concern for underwriters as historically this is where the most frequent and severe claims have occurred. The extent of US exposure will have a strong bearing on insurer appetite and any terms they’re prepared to put forward.
Majority shareholder – this variable has changed throughout the years. Previously, having a major shareholder was considered a positive by underwriters, as there were fewer shareholders who could sue. However, in recent times, this has given rise to claims, as majority shareholders have more control and influence over how the organisation is run.
Mergers and acquisitions – this activity creates risk and therefore is the level of any mergers, acquisitions or disposals is a major rating factor for insurers.
Share price performance – where a company’s shares are traded publicly, the share price, volatility and level of trading reflect the business’s performance of the business and affect insurers’ view of risk. A volatile share increases the chances of a securities class action being brought against the company and key individuals.
Advice for businesses seeking D&O cover
It’s no longer acceptable to assume that your renewal will be secured easily, or that your policy will have the same breadth or depth of coverage without a significant rise in premium.
The extent that your renewal will be affected will vary depending on your risk profile, claims record, strategies for risk management, and the capabilities of your insurance broker but in this current climate, the vast majority of organisations are likely to see sizeable raises in premium rate. Now, more than ever it’s important to work with an experienced broker that has access to the global insurance market, which can work with you to help you find a suitable solution.
This article and the articles referred to are not intended to give legal or financial advice, and, accordingly, it should not be relied upon for such. These should not be regarded as a comprehensive statement of the law and/or market practice in this area. In preparing these we have relied on information sourced from third parties and we make no claims as to the completeness or accuracy of the information contained herein. It reflects our understanding as at 27/05/21, but you will recognise that matters concerning COVID-19 are fast changing across the world. You should not act upon information in this email or the articles referred nor determine not to act, without first seeking specific legal and/or specialist advice. Gallagher accepts no liability for any inaccuracy, omission or mistake in these, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein. No third party to whom this is passed can rely on it. Should you require advice about your specific insurance arrangements or specific claim circumstances, please get in touch with your Gallagher representative.
