Increasingly complex claims events are causing some insurers to review their capacity for D&O
Risk managers could struggle to renew their directors’ and officers’ (D&O) insurance policies on the same terms, owing to an increasing number of complex claims.
D&O regulatory actions have continued to increase over the past 12 months, according to Aon’s 2016 Market Review, and global product recalls are morphing into more complex litigation events across both financial lines and casualty markets. This is causing many insurers to review their capacity.
“Regulatory actions are uniformly more common and not just limited to domestic regulators, with numerous examples of cross-border investigations highlighting the growing risk in doing business in new markets,” Aon’s report said.
AIG Australia chief executive Noel Condon said the insurer’s appetite for D&O had “absolutely” changed in recent years owing to an increase in securities class actions.
“We still have appetite but we’re not as hungry as we used to be,” he told StrategicRISK. “Late last year we started to refine the amount of capacity we put out. We’re still willing to put out capacity, but as a primary for side C, probably $10m is as much as we want to do and we’re going to charge more for it.”
This reduction in capacity is one reason that Australian clients are “struggling to get their insurers to renew their D&O policy on the same terms with the same limits”, according to HDI Global ASEAN D&O underwriting manager Alistair Sandilands.
Sandilands said HDI was “one of the few insurers not to have changed its appetite in D&O” in recent years.
“There’s a temptation [for insurers] to write as much business as possible regardless of the quality of risk but you can’t sustain that,” he said. “Until premiums and deductibles reflect the relative exposure that insurers are facing, it’s a case of being selective with choosing the right risks.”
Listed companies may find it more difficult – or expensive – to purchase D&O, according to Sandilands. Certain industries are also more litigious, such as the mining, resources and energy sectors, which will be reflected in the premiums. The past performance of a company’s directors must also be taken into account.
“We still see claims from some of the best risk-managed companies where a person’s decision in one moment in time has led to questions being raised and allegations being brought as a result. It’s not necessarily bad companies that are getting claims. Directors are humans and they are fallible as a result,” Sandilands said.
As a result of increasingly diverse D&O claims, many clients are placing their D&O risks into an international programme, according to Aon.
But Sandilands said there are some important things to consider when it comes to a global D&O programme.
“It’s very common for the parent company not to release the policy wording to local operations for confidentiality reasons,” he said. “This means that directors don’t know what they are covered for until they’ve had a claim. And it could then be that the aggregate group limit has been used up already and the local director is left exposed.”
For this reason, it’s important clients stress test their insurance policies, especially when they’re part of a global programme, Sandilands said.
“They may find that they don’t have the cover that they think they do,” he said.
In Asia, however, Aon reports that “most” clients achieved reductions of 5% to 10% last year for their D&O policies. This is largely owing to additional capacity in the market from new carriers including Generali, Tokio Marine, Berkshire Hathaway and new Lloyd’s syndicates.
“Several other existing Lloyd’s syndicates also expanded their product offering last year by adding financial lines,” the report said.
Insurance clauses for D&O
Standard D&O policies generally contain three insuring clauses: Side-A, Side-B and Side-C clauses.
Side-A insurance clauses
The Side-A insurance clause is commonly referred to as the “directors’ and officers’ liability clause”. It provides coverage for individual directors in respect of loss for their wrongful acts carried out in their capacity as a director of the company in circumstances where the company is unable to indemnify the director.
Side-B insurance clauses
The Side-B insurance clause is commonly referred to as the “company reimbursement clause”. This clause operates in circumstances when the company can indemnify the directors in respect of loss arising from their wrongful acts.
Side-C insurance clauses
The Side-C insurance clause is commonly referred to as the “corporate entity clause”. This clause will provide coverage for the company in respect of its corporate liability. This insurance clause has now been broadened to include coverage for loss and defence costs for securities claims.