New D&O developments further impact financial lines market conditions
Around a year ago we began to see some pressure from insurers on financial lines placements to decrease their capacity, increase premiums and increase policy retentions.
This was a response to deteriorating loss ratios for D&O and crime risks in particular. At that time the resolve of insurers to “walk away” was inconsistent and on some occasions pressure could be brought to bear on insurers to avoid the worst outcomes in terms of premium and capacity.
Twelve months on and a number of further developments in D&O risk have impacted insurance market conditions for financial lines even more. There are now very few insurers with appetite for growth in D&O. Many are restructuring their portfolio by non-renewing underperforming business or imposing onerous terms and conditions in order that clients move elsewhere at renewal. Some insurers are exiting financial lines altogether and Lloyd’s itself has limited the amount of premium capacity in these lines for syndicates in 2019. In a rising premium market, the natural consequence of limiting premium capacity is reduced line size and non-renewal of some business.
We have also encountered insurers’ reluctance to offer policy period extensions where renewal submission are not received in good time. For that reason it is imperative that clients’ expectations are carefully managed around likely premium increases and limitations in cover, but also the length of the renewal process and how more underwriting scrutiny is involved.
• The further developments in D&O performance referred to above must be seen in the following context:
• No slowdown in the frequency and severity of US securities class actions.
• Unfavourable decisions regarding ADR level 1 traded shares, which had previously been considered as exempt from US jurisdiction.
• Defence costs inflation, particularly in criminal prosecutions and regulatory enforcement actions
• Lloyd’s performance regulator placing D&O insurers under scrutiny and in some cases limiting their ability to continue in the class
• Large D&O claims emanating from environmental issues such as tailings dams
• Unfavourable outcomes in previously notified claims particularly in Latin America
While not all clients have been directly affected by the aforementioned factors, there is no doubt that the D&O insurance market finds itself needing to make changes in order to be sustainable. Insurers are seeking to rebalance their portfolio, and are prepared to lose business in order to do so. Whilst we always strive to differentiate each client, as a general trend across the D&O market on renewals we are seeing:
• A reluctance to extend current periods of insurance
• Premiums increasing, in some cases to multiples of the expiring premium
• “Managed” (i.e. reduced) capacity, with each insurer generally not prepared to exceed £10m, often less on risks that have US securities exposure
• Limits being applied in the annual aggregate, rather than “any one claim”
• Higher retentions for company losses (particularly for companies with Level I American depositary receipt (ADR) programs, which have previously been viewed as lower risk)
• Imposition of sub-limits and/or exclusionary language
• Pre-agreed discovery provisions being removed
• Insurers unwilling to compete at primary level.
• Much more scrutiny on policyholders’ financial health and performance
• Insistence on client meeting prior to renewal, with ability to ask questions
Companies that have had D&O claims are particularly, but not exclusively, feeling the effects of these changes.
The number of traditional primary D&O insurance markets for large risks with multinational presence is very limited. Excess capacity remains, but not at the competitive levels we’ve seen over the past few years, and many insurers are imposing minimum attachment points and minimum rates as percentage of underlying layers as part of their efforts to reposition their portfolio.
Lockton can help you reach the best possible outcome at renewals by:
• Ensuring that a full and complete renewal submission is provided at least 4 weeks prior to renewal date to make sure the cover gets extended
• Approaching alternative insurers and providing a range of options to mitigate any restrictions imposed
• Addressing negative risk factors e.g. debt maturing in the next 12-18 months, new claims or circumstances to notify, collecting and submitting the required information along with a strategy to mitigate these risks
For further information, please contact:
Head of Management Liability
Tel: + 44 (0) 20 7933 2669