News & Insights

Global State of the Market Report for Directors’ and Officers’ (D&O)

Published 19 August 2021

National Head of Professional and Financial Risk, Michael Herron has contributed his perspective to July's Global State of the Market Report for Directors and Officers (D&O) examining the factors influencing insurers of C-suite risks for businesses across 5 international jurisdictions. 

The business impacts and economic uncertainty created by the COVID-19 pandemic add to other background trends such as increased litigation from class action activity and greater regulatory scrutiny. These have already contributed to material increases in premiums, restrictions in policy coverage and constraints in insurer capacity for many clients in the D&O liability marketplace, particularly for those publicly listed companies with larger market capitalisations and seeking securities (Side C) entity cover.
 

 

Some positive change to insurer attitudes to D&O risks

Herron notes that while Australia-based companies continue to face challenges with obtaining capacity coverage, at mid-2021 there is some cause for optimism. With year on year premium increases providing a degree of confidence there are signs that insurers are prepared to trade on new opportunities and with more innovative program structures. 

These increases in premiums, alongside of underwriting restrictions imposed in reaction to the impact of COVID-19 in 2020, have compelled businesses to review their buying patterns and necessitated leveraging of existing relationships to secure renewal terms from limited options in the distressed global insurance.

While the implications of COVID-19 continue to play out, the concentrated efforts by businesses, directors and executive management teams to make material decisions impacting customers, employees, shareholders and other stakeholders throughout the pandemic potentially heighten the risks confronting directors and officers. 

Externally, this includes potential creditor or insolvency claims, and internally occupational health and safety obligations to a company’s workforce, as well as other employment related exposures. There has been a continued gradual increase in the number of employment claims filed, but consumer/employment claims tend to have far less impact on D&O insurer sentiment than securities claims.


Factors influencing businesses to self-insure for D&O

Premium levels are causing many large listed companies to drop Side C (and sometimes Side B) completely and take on the balance sheet risk, and some smaller businesses cannot justify Side C premium/retention levels costs to their budgets.

Sector sentiment is a key challenge, with insurers tending to apply a broad-brush industry response, regardless of the risk metrics and variable characteristics of each distinct entity. Insurers respond conservatively to certain industries they consider to be high risk activities such as projects, contracting, valuations, certification, forecasts, new or innovative design/technology and the provision of any advice or service with complexity. As economic pressures increase, there is likely to be further impact on premium rates and capacity.

“The challenge for directors is to break sector sentiment assumptions and get credit for what makes their unique risk different and acceptable for risk transfer to insurers,” Herron says. “In these conditions, directors can be effectively differentiated to get better than sector outcomes, though this takes real skill and finesse.”


Business response to changed conditions

The pandemic is an ongoing influence. “While we have not yet seen the predicted wave of insolvencies, even after the ‘fiscal cliff’ of government stimulus and JobKeeper Payments ending in 1Q21, but there is caution about the extent of harm for the economy if the largest cities continue to experience the uncertainty of extended lockdowns,” Herron notes. 

Instead, he observes, government action seems to be aimed towards legislative and judicial reform to corporate regulation in another optimistic sign for company directors seeking clear pathways to capitalising on trading opportunities in changing economic conditions.

“We are seeing a surge in initial public offerings, and some variations with more adventurous structures with dual listings proposed for ASX/TSX or ASX/NYSE, or ASX/LSE, or ASX/NASDAQ, or even delisting ASX. Special purpose acquisition companies are increasingly common in the US but currently are unable to list on ASX due to cashbox rules, but this may change. Australian companies may be SPAC acquisition targets,” Herron says.
 

Expertise in presenting D&O risks to insurers

The Gallagher Professional and Financial Lines specialism has the market reach and relationships to assist Australian directors and executives with presenting D&O risks in optimal terms to potential insurers. 

Further reading

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Directors and officers’ liability insurance

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Insurance market conditions report: Navigating the Hard Market: Q3 2021

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Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective.
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