Structuring a global D&O programme

Brian Botkin, head of multinational, global financial lines at AIG, examines how directors and officers insurance (D&O) differs from other lines when it comes to global insurance programmes, and explains how such programmes should be structured.

Is it possible to describe a typical global D&O programme? Are there any discernible trends in the way such programmes are put together?

It is not uncommon for a D&O programme to look very different to the other programmes in a client’s portfolio, because of the unique considerations in their structuring. For example, clients almost always consider whether non-admitted insurance is allowed in a jurisdiction. However, with D&O, they also need to consider whether or not indemnification of individual insureds is allowed. Further, clients are increasingly considering the differences in legal systems (civil law versus common law, for example) in their structuring logic. Therefore, the trends are towards bigger and more robust programmes in D&O. The old list of ‘non-admitted not allowed’ way of structuring programmes is now the starting point, not the end point.

Old solutions are also evolving to provide better coverage at the local policy level. For example, we are starting to see more clients enhance their Freedom of Services-led programmes with underlyers in specific EU countries that have significantly different coverages available locally, or where the client has significant exposure via local decision making.

Are local policies and local compliance becoming more important?
As D&O programmes evolve, the demand for proper, local coverage terms is increasing. This desire for local coverage in addition to local paper is creating some unique challenges to carriers. Historically, these programmes were purchased to simply satisfy tax obligations and to check the box on local paper. As claims have increased, the quality of the local coverage has become more and more important to clients.

The complicating factor in D&O is that the perils are not uniform across all countries. Corporate structures and fiduciary obligations vary widely from country to country (even within the EU). We are seeing less dependence on the Freedom of Services solution and more reliance on individual local policies where clients have significant operations in the EU. We must be able to quantify our local offerings beyond the simple marketing term of ‘good local standard’.

Is there greater demand from local directors for insurance protection?
Local directors are becoming increasingly dissatisfied with simply a global D&O policy issued to their head office. In some cases, they will go as far as to purchase local standalone policies if a programme is not made available to them, or does not contain the local coverage terms discussed above.

What exclusions are typically found in such a programme?
A well designed multinational programme will be underwritten globally, but executed locally. That means that while a global programme may have an insured versus insured exclusion, a German or Swiss underlyer cannot have such an exclusion, as many D&O claims in these jurisdictions would fall under the definition of insured versus insured, due to the corporate structure found in these countries.

Is it important for programmes to have full limits in all territories, or do companies look for DIC/DIL coverage?
It is important for clients to purchase local limits that are in line with the exposure in that jurisdiction. This often means purchasing the most appropriate local coverage and the full limits available (up to the programme limit). There may be tax consequences to relying on DIC/DIL to do the work of a properly constructed local policy.

What are the advantages for a risk manager of having a centralised global D&O programme?
The two main advantages are efficiency and certainty. Properly structured D&O programmes give the client the certainty of access to both globally negotiated and locally essential coverages. This will avoid surprises that come when your English language, common law policy may not exactly fit into a French language, civil law situation. Further, clients are allowed to efficiently purchase policies in local jurisdiction without the added expense of redundant limits.

What are the commonest problems arising with global D&O programmes?
The biggest problem with D&O programmes is incorrect or incomplete structuring. There is an overreliance on Freedom of Services, and other ‘silver bullet’ solutions have led to disappointment when claims were not paid where the client had expected.

Do the differences in legal systems and legislation mean that D&O global programmes are more complex, tailor-made and time consuming than many other lines?
I don’t think that the legal system differences necessarily make them more complex, but it makes them different to other programmes for different lines of coverage. For example, if a risk manager were simply to use the old ‘stop light’ method of red, green and yellow countries based on whether or not non-admitted insurance was allowed, they would end up with a different country list than if they performed an analysis that also included differences in legal system. Where the additional work may come in is if these are countries that are not part of other programmes in their portfolio and they now have to produce ‘pre-issuance’ documents in new countries.

Presumably with D&O it is even more important than with other covers for the claim to be paid in the territory where the loss occurred. And that generally means a local policy and a local presence to help facilitate the claims process is preferable?
This is absolutely the case. The need for local payment is much greater for D&O because of the nature of the claims (they are against individuals). The factor to consider here is whether or not indemnification of individuals (by the corporation) is even permitted in a particular country. Many countries do not allow such indemnification. In these countries, the A-side of a D&O policy is the only thing standing between an individual and their personal assets. A catastrophic failure in the design of a D&O programme is one where the individual insureds do not have access to indemnification and are left without access to local claims payment.

Contributed by Brian Botkin, head of multinational, global financial lines at AIG