Over the last decade, we have seen significant changes affecting the domestic D&O insurance market, the risks and exposures of companies (and their D&O), and how the insurance market is addressing these policies. These negative impacts have continued to contribute to a hard market climate following the 2008 global financial crisis.
We continue to see sharp increases in litigation against companies and their Directors and Officers. New and more complicated risks have become more common in volatile business environments caused by the pandemic. The D&O domestic insurance market landscape is ever-changing.
We are now seeing that there may be a need to guard better against "event-driven litigation" claims triggered by companies acting out on social diversity issues, poor sustainability performances, or underestimating their risk to COVID-19 risks..
As the D&O insurance sector becomes more challenging to deal with, constant increases in lawsuits and claims are made as the year goes on. Many insurers are still impacted by their previous year's policies and the changes they made in 2020 to support clients due to COVID-19. Due to this, underwriters and insurers face great uncertainty in the future as the world assesses the exposures caused by the pandemic.
As the market continues to harden globally, these risks can only worsen. Why is the Canadian and US Insurance market hardening at all?
There is a multitude of contributing factors driving the hardening conditions of the domestic D&O insurance market. The number of active litigation cases and settlements contributes to how insurers see the market's state and capacity. In general, litigations and settlements continue to rise to unseen numbers, breaking records three years in a row from 2019 to the first few months of 2021.
What is the difference between a 'Hard' and 'Soft' Market?
These terms have always been used to describe the state of the market for various insurance sectors. Sometimes they are thrown around, so often, we lose a sense of what it means to be in a hard and soft market, especially for some insurance sectors; these have been in a hard market state for years.
- Higher insurance premiums
- More complex underwriting criteria
- Reduced capacity to place
- Less competition among insurers (therefore less options)
- Extensive restrictions (wording/applied endorsements)
- Excess insurers not following terms provided and set by underlying insurers
- Lower insurance premiums
- Broader coverage options
- Relaxed underwriting criteria
- Increased capacity to place
- Increased competition among insurers (more options available)
Key Trends of D&O Insurance in Canada
Higher premium rates: Prices are significantly increasing. As a result, many insureds are accordingly reducing their coverage where exposure increases to meet financial demands insurers have for insurance policy coverage that these companies may need essentially.
Reduction of limits: Although increased deductibles are a common trend of the market.
Reluctant market: Insurers have become increasingly eager not to quote new business, leaving many first-time insureds out in the cold with fewer options for coverage.
Reduction in the amount covered: Many policies will now include exclusions for COVID-19 related claims, leaving many insured critically exposed should their business have been severely impacted by the pandemic. There may also be an increase in limitations or exclusions regarding comprehensive bankruptcy, cybercrime, or creditor-related claims.
An increase in underwriting: More and more underwriters require detailed information before offering quotations than previously seen. The process of providing information, receiving a quote, and binding a client has also become longer and more complicated. As insurers continue to switch between appetites and regularly change their minds about what they will and won't bind, it has also become a more unpredictable system for brokers and insureds.
Key Risks & Concerns of D&O Insurance
While publicly listed companies have always been generally more exposed to D&O risks, private companies face sharp increases in risk exposure. The pandemic has caused various exposure issues globally, giving private companies and their executives great exposure to litigation risks.
As D&Os of private companies become more and more closely involved with the company's operation and business decisions during the pandemic climate, decisions made can be easily held personally liable through different forms of litigation.
Here are some of the key risks and concerns of D&O insurance that the market and underwriters have developed:
- The increasing risk of insolvency exposure. While insurers see an increase of risk all the time, these risks are most significant when a company goes into an insolvency process or undertakes financial restructuring. This may compromise stakeholder groups' interests and create internal litigation claims due to conflict of interest.
- Growing cybersecurity risks – the cybersecurity landscape has continued to evolve during the pandemic. Ransomware attacks and data breaches are becoming the most popular forms of cyber-attack. The work-from-home culture the pandemic has enforced has also increased cyber exposures for many companies.
- Concerns regarding bankruptcy as the number of companies becoming bankrupt has increased by 35% compared to 2020 in the first five months of 2021.
- Uncertainty of how to phase out 'temporary policy measures' initially enforced by underwriters and designed to support businesses in the pandemic.
- 2021 has shown the first seen class-action lawsuits related to covid-19. Claims occurring regarding the impact of covid-19 and the pandemic on businesses and D&O are slowly becoming more expected this year and will be expected to rise continuously throughout the year. There are concerns about the underwriter's capacity to pay out for these claims were legally liable.
- Persistent securities class action activity.
- Concerns regarding return-to-office steps taken by businesses that may increase specific exposures. There are also concerns about how shareholding will be handled during this period regarding forms of litigation stemming from employees and customers.
- Recently, a few claims have been caused for environmental issues, and climate change caused accidents. There is the worry that these may continue to increase and become a litigation trend in certain parts of the globe, such as Canada and the US.
- There has been a drastic increase in 'event-driven litigation claims' This has occurred as more and more companies face public scrutiny due to current popular social, economic, environmental, and political public views. Many companies have, as a result, taking part in social justice trends, activity investment campaigns and, money laundering schemes that can quickly turn into litigation cases/trends shortly.
These trends and risks suggest an essential need for businesses/clients to analyze their evolving threat landscape and adapt the best they can to reduce risk. This will help clients how are struggling to adjust to hard market conditions when searching for new policies.
What should we expect?
Premiums are expected to continue to rise. Litigation claims and risk exposure should also grow alongside premiums. For D&O insurance policies, the business climate has globally changed, and it is more than likely that we may have to accept these changes as the new normal and continue to adapt as we push forward. There will be a greater need to reach out to alternative markets and make more connections to widen the scope of possible insurers/quotations received/offered for insurance brokers to place D&O risks.
Policy prices will continue to rise; however, as seen in some cases, the fundamental law of "supply and demand" can eventually even out prices and bring them down over time.
As a positive, we should expect more awareness from D&O clients and firms looking for exposure. The current market environment has made businesses and their representatives more aware of their risks and exposures. Brokers are finding their clients more open and cooperative in discussing their concerns regarding risks and insurance, making conversations between clients and brokers smoother and easier to lead to policy placements overall.
Recommendations for Companies in need of D&O policies
Whether you are a broker looking to help ease your clients' concerns or searching for advice surrounding D&O to lessen the impacts of the market on your company, we have some recommendations for companies in need of D&O policies during this challenging market period.
- Take note of current circumstances. Know your insurers and their products. Many D&O insurers find it far easier to exclude COVID-19 claims from their new (and renewal) policies than update their wording to accommodate these claims. Why? There is great worry that most of the claims that are expected to occur in the future will be COVID-19 related and that insurers under contractual policies may not appropriately handle the number of potential claims coming in or the nature of the claims in question. It will be essential to understand how your current policy, or a potential policy, will assist you should you need to file a claim in response to the covid-19 pandemic's impacts, should the company have been severely impacted.
- Approach Renewals earlier than usual. With the market's difficult circumstances, it is beneficial to approach quotations far earlier to ensure options across insurers and brokers a thoroughly explored, especially should the policy need specific special events covered due to certain risks and exposures. This will also be beneficial to ensure stability and awareness, as insurers are finding it more difficult to provide "as is" renewal terms for clients already bound with them due to the changing nature of D&O insurance policies and the market globally.
- Look into Policy Extensions. This is good should you have a policy perfect and concerned about your renewal terms or first terms with another insurer following your policy, which will not include the coverage options your current policy has. Policy extensions can allow directors and officers to prioritize their company's efforts to adapt covid-19 response protocols and prepare legal responses to more detailed questions D&O insurers will be asking come their renewal time.