AGCS calls for partnership to tackle D&O and cyber challenges in Germany

German insurance managers should not expect a significant improvement in the directors and officers (D&O) insurance market this year, as carriers face up to a highly uncertain legal and economic landscape driven by the ongoing impact of Covid-19, an expected rise in insolvencies, rising litigation and claims, and recent regulatory initiatives in Germany and across Europe, according to Stephan Geis, regional head of financial lines, AGCS central and eastern Europe.

The German insurance management association, GVNW, last week held its annual Financial Lines and Cyber conference and it was inevitably a lively event, given the state of the D&O market in particular.

Members of the GVNW have vocally complained about the brutal nature of the recent market hardening, with one leading German insurance manager describing the dramatic rise in prices and loss of capacity in the D&O market in particular as a “massacre”, during the conference.

In interview as the event took part, Mr Geis told Commercial Risk that this is indeed a “difficult” time for insurers and their customers in the German D&O market and gave little suggestion that conditions would markedly improve in coming renewals. The outlook for the cyber insurance market is also challenging for all, as incidents and claims continue to rise and the market faces up to the systemic threat posed by this line, he added.

But Mr Geis did say that AGCS had worked hard to start D&O renewals as early as possible in 2020, to enable proper discussions to take place and avoid nasty surprises.

The message is clear for German insurance buyers in coming renewals for D&O and cyber cover: gather as much relevant intelligence as possible, start discussions early and be transparent, to secure the best possible terms and conditions.

“The pandemic has further worsened the situation in financial lines and especially in the already tight D&O insurance segment. We are assessing each individual D&O risk very closely. In particular, we examine the insolvency risk and the financial impact of the pandemic on a specific company or industry, but also issues such as crisis management, stock market listings, a US connection of the insured, or possible liability risks from disclosure obligations of listed companies in connection with Covid-19. For many companies, there is currently a great deal of uncertainty about future business prospects, which is understandable but difficult for any D&O insurer,” Mr Geis told Commercial Risk.

“In this challenging market environment, we strive for fairness, open communication and transparency. We inform our customers as early as possible about changes in wordings, capacity or regarding our risk appetite. We sent 75% of our 2020 year-end renewal offers or indications to our customers last summer – so several months ahead to allow for several iterations and in-depth discussions,” he added.

Mr Geis was unable to comment specifically about the level of capacity that AGCS will commit to D&O lines in 2021. But his comments suggest that insurance managers should not expect a flood of fresh capacity to enter the market this year to take advantage of the sometimes hugely increased prices. Established D&O carriers are still making up for the long soft market and are nervous about the latest trends.

“In the past year, premiums for D&O insurance policies in Germany have generally increased, in some cases significantly, while less capacity is available, particularly for highly exposed risks. Especially in the case of new placements, many insurers are very cautious. As a global D&O insurer, AGCS remains committed to working in partnership with our customers to ensure we have sustainable solutions for all parties involved,” he said.

“While the market hardening is still a mixed picture in many other lines of business and markets, this trend is certainly evident in the D&O insurance segment. Many insurers are still digesting the effect of pricing inadequacy and exposure and loss trend increases from prior years. Adding to this is great uncertainty around forward-looking exposure assessments, in particular the impact of Covid-19 on the economy in general and on specific industries. Combined with many ‘known unknowns’ like climate change, cyber risks, or environmental, social or governance factors, this has created a lot of nervousness in this sector,” continued Mr Geis.

One major reason for this nervousness among D&O underwriters such as AGCS is the highly uncertain claims environment that comes on the back of recent poor claims records in the sector.

“D&O claims remain on a high level in Germany, which is also supported by statistics from the German Insurance Association [GDV]. Directors and officers are increasingly held liable, there is a growing number of investigations and litigation, often around compliance failures,” said Mr Geis.

“Forthcoming insolvency warnings in the midst of the pandemic are among the top concerns for the German D&O insurance sector, as insolvency is a key cause of D&O claims. Insolvency administrators usually look to recoup losses from directors. The worst is still to come in the second half of 2021, when the adverse impact of subdued economic activity during lockdowns and phasing out of governmental support programs will fully materialise,” he continued.

Another difficult market for the German insurance management community currently is cyber, as prices are rising fast and capacity is falling at a time of increased demand. AGCS, along with the rest of the market, clearly see cyber as a great opportunity to build new business over the long term, but recent trends are forcing a more cautious outlook with a more selective approach to capacity offered.

“Cyber is one of the top business risks globally, according to the Allianz Risk Barometer 2021. We see a steady increase in cyber claims globally – driven by increasing digitalisation and IT vulnerabilities due to the move to remote working/operations during the pandemic as well as ever evolving cyberattack patterns. The rise of ransomware attacks is particularly concerning as these attacks are ever more targeted and ransom demands are rising. In 2020, AGCS has been involved in a peak of 980 cyber claims together with other insurers, up from about 800 in 2019,” explained Mr Geis.

“In this environment, we adopt a prudent underwriting approach to ensure that we are a sustainable partner for our clients in the long term. Assessing each risk individually, we strongly focus on the level of IT maturity of a company. We continue to offer cyber coverage with significant capacity, but less than in the very early years in the German cyber insurance market. We are also adjusting terms and conditions to address rising ransomware exposures. We carefully manage our regional cyber book as part of the global portfolio, considering potential accumulation risks from catastrophic cyber events, as well as striving for full transparency of silent cyber exposures in traditional industry insurance policies,” he said.

AGCS, along with many others in the market, is shifting its focus to risk management and loss-control measures and services to try and deal with the uncertain environment, explained Mr Geis, pointing to the group’s recently announced venture with Google and Munich Re as an example.

“We are constantly boosting our capabilities to understand evolving cyber risks, to spot new trends early on and better service our clients. For example, we are collaborating with partners such as Bitsight, leveraging in-house as well as third-party data such as monitoring hacker activity on the dark web. We also address shifting cyber risk exposures in companies in our underwriting strategy. Through our new cyber insurance solution with Google Cloud and Munich Re in the US, we remain at the forefront of understanding and managing emerging risks associated with increasing cloud usage, and are helping to create a sustainable cyber insurance market,” he said.

Mr Geis said AGCS is looking increasingly to help its insureds to mitigate cyber exposures by reviewing their IT setup and, as needed, recommending improvements to raise the IT maturity level and cyber resilience. It also shares and publishes practical guidance and checklists to improve IT security when working remotely in the pandemic environment, he said.

“Cyber incidents should be part of any business continuity planning. We offer our expertise and best-practice approaches to develop cyber crisis management plans and also conduct training and dry runs. Combatting cyber resilience requires a strongly cross-function and collaborative approach – both within a company but also together with external partners. That’s why Allianz is a member of the Charter of Trust, which is the world’s first joint charter for cybersecurity, with many companies being members. It calls for binding rules and standards to build trust in cybersecurity and further advance digitalisation,” concluded Mr Geis.