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11 January 2021

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How to navigate the challenges of the Directors & Officers Insurance market

The UK Directors and Officers Liability (D&O) insurance market has changed considerably in the last 2 years and these changes have been accelerated as a result of the global pandemic.

The level of capacity in the market has reduced significantly with no new entrants and existing providers seeing a decline in their D&O book performance due to a sharp rise in the overall frequency and severity of the claims.

The UK landscape has seen increased numbers of class actions and a changing regulatory and legal environment globally with a greater emphasis on individual accountability of senior executives.

In 2019 we saw rates increase on average go from 34.9% in Q1 to 77.3% in Q3 and this trend has continued in 2020 with some insurers applying 100% rate increases in certain circumstances.

What do I need to know?

Along with significant rate increases Insurers are also looking to restrict cover in certain areas which policyholders need to be aware of:

  • Automatic Run Off – The need for automatic run off is important however in some cases automatic contractual entitlement has changed or been completely removed. On acquisition run off may not be available or if it is the underwriter may amend the terms provided and include additional exclusions.
  • Overseas Subsidiaries – It’s important where a business has overseas entities that policyholders look out for changes in territorial limits and possible exclusions of foreign subsidiaries. Insurers are pushing for policies to be issued in local territories and seeking to exclude those from the UK policy.
  • Reporting Periods – Deletion or alteration to this provision is on the increase. This passes all the control to the underwriter at subsequent renewals and the implications as a business should be reviewed.
  • Endorsements – It is important to pay attention to additional endorsements added to the policy by insurers which could have significant consequences to the cover, these are appearing with a greater frequency as a result of the market and impacts of the Pandemic.
  • Deductibles – Across the board insurers are looking to impose increases in the deductible applying to all sections, especially for D&O, Pension Liability, Employment Practices Liability and Employee Crime.

It has never been more important to ensure that the cover provided under your D&O Policy hasn’t been watered down from that which was provided previously. Insurers will also be looking to consider 5 key factors as part of the rating, the more information a policyholder can provide to the underwriter the better the outcome:

  • Jurisdiction – Where do you have operational exposures? Are there heightened exposures in a certain territory which could affect the exposure to the entity such as South America where insurers would look to see particularly stringent anti bribery and governance controls.
  • Industry Sector – Certain Sectors are perceived as higher risk especially as a result of the pandemic such as hospitality, leisure, retail, insurers will expect to see a good level of Covid Risk Management and financial strength.
  • Claims Activity – How has the company performed from a claim’s perspective? Where claims have occurred, what has been carried out to prevent a similar future loss occurring.
  • Financial Stability – Underwriters are focusing on the financial stability of an entity especially as a result of the pandemic, insurers will want comfort that the business has the capability to trade out of the crisis with adequate funding to keep the business solvent.
  • Merger and Acquisition Activity – If the company has been acquisitive it should be able to demonstrate that there are strong integration plans and governance controls.

As with all covers in the current hard market, the key is for clients to start the renewal process early and provide as much information as possible so the underwriter can make a well-informed decision on pricing and cover.

If you would like to set up a meeting with us to discuss your needs, please contact Richard Grainger
T: 020 7330 8705