D&O insurance is currently in the midst of a crisis for buyers. COVID-19 has profoundly changed the rules of the game for D&O purchase, just when this product offering is needed more than ever. Premiums are rising, coverage is restricted, and terms and conditions are being enforced – all of which comes at a time when underlying exposures are broadening and more personal accountability is being thrust on the c-suite.
Experts in the industry are saying that D&O is facing a rate hardening at levels not seen since 1985, with hospitality, retail owners (or mall owners in the US), energy, automotive, entertainment and airlines all in the firing line. These are all industries that are highly dependent on foot traffic – which have seen revenues collapse due to COVID-19.
Many of the risk managers that Russell Group have spoken to have seen their premiums increased substantially.
Yet, there is a justifiable argument that COVID-19 is not the cause of the hardening of the D&O market but has accelerated many of the underlying trends that were troubling the sector.
This was the consensus of experts speaking to Financier Worldwide who said that the market started hardening in late 2018, due to the following trends:
1. Event-driven litigation.
2. Merger Objection Lawsuits.
3. Rise in securities class-action suits.
4. Increased claims frequency.
5. Higher Legal Defence Costs
6. #MeToo Related Links.
Once COVID-19 made its presence felt, as many organisations fought to stay afloat, decision-making of all companies took on a greater responsibility, as decisions made in boardrooms could send stock prices tumbling or make employees redundant.
Greater exposure and accountability of decision-making are a direct result of the impact of COVID-19 and the way it has affected D&O along with other changes, according to Cain Jackson, partner at Wotton Kearney who notes:
1. Heightening risks associated with financial management of a corporation and associated decision-making
2. Making D&O responsibilities such as workplace health and safety, a concern at a c-suite level for the first time.
3.Increasing exposure associated with profit guidance and forward-looking statement for D&O listed entities.
4. Whether D&O can really cover for claims arising out of corporate insolvency.
Furthermore, COVID-19 has focused greater awareness among diverse directors and officer as well as stakeholders – from investors, to suppliers and consumers - who are involved within their organisation
However, it is the shareholder and investor claims that directors need to be concerned about, according to James Whitaker, partner at Mayer Brown International LLP who notes that shareholders may launch claims based on stock market falls driven by ‘bad events caused by COVID-19’.
In managing and preparing their statement outlining their response to COVID-19, many directors will have to take a leaf out of Johnny Cash’s songbook and “walk the line”, in not overplaying or underplaying the COVID-19 threat, lest they find themselves a subject of a securities class action.
The insurance response to the hardening market has been to push up rates, enforce contract limits and impose exclusions. Since the crisis has started, there have been 20 D&O related COVID-19 claims according to Business Insurance.
According to industry analysts, capacity is being cut severely. Insurers who previously offered $20 million in capacity are now offering only $10 million. Likewise, insurers offering $10 million in capacity are now offering $5 million.
Furthermore, industries such as retail are seeing D&O policy insolvency exclusions written into their agreements. This is not to mention COVID-19 exclusions being imposed across the board.
In response to the insolvency/COVID-19 exclusions and rising prices, many risk managers have actively explored trusts, captives, and integrated risk programs according to Laura Coppola, Head of Casualty, Financial and Professional Liability for Swiss Re North America Corporate Solutions.
Likewise, many risk managers are actively reconsidering their D&O program strategies in response to the market changing with some taking less insurance as a result. None have not taken the drastic step of Tesla, which cancelled its D&O coverage. Instead, Elon Musk will be personally indemnifying the company.
Clearly, over the coming months the D&O market will continue to harden. Yet, the extent of the damage will be dependent on whether there is an economic recession, which is a concern for many experts. A recession will inevitably result in company insolvencies and higher D&O claims, all of which would add higher costs at time when businesses are fighting for their survival.
The future of the D&O market is very uncertain. Looking back, COVID-19’s biggest impact may be forcing many corporates to actively look for alternative risk solutions such as captives, sooner than they would previously have done. The question that should be concerning everyone involved in the D&O market is not about pricing or exclusions. Rather, if the economy bounces back, will there be a competitive marketplace for D&O left?