D&O market set to harden further with concerns over capacity shortfall

The D&O market is set to harden further for European and global firms at upcoming renewals, with a potential capacity shortage on the cards for some buyers as insurers try to turn around a badly performing line of business. As mounting claims frequency and severity combines with more than a decade of soft pricing, D&O insurers have produced some bad results in recent years. Although performance varies by insurer and country, results have rendered the market unsustainable, insurers say. This has seen a market correction that began in the US, is now being felt in the UK and is set to hit Europe. Further hardening is on the way to ensure the line of business remains sustainable, according to both insurers and brokers. Despite more than a year of rate “corrections” in the D&O market, Marsh has warned of a further 12 to 24 months of hardening and a potential capacity shortfall as year-end renewals approach. “There is concern over the available capacity towards the end of 2019. With insurers experiencing less pressure to write new business and/or to grow their books, as well as the upward movement of rates, there could be a capacity shortage towards 2019 as markets meet their targets for the year-end,” Winsee Cheung, management liability placement leader of Marsh JLT’s UK finpro practice, told Commercial Risk Europe. She added that almost all D&O markets have changed their approach to underwriting in the past 12 months. Capacity management seems to be insurers’ most favoured tool, but corrections are also coming in the form of rate changes, retentions and/or breadth of coverage changes, she added. Ms Cheung said that although there may be a slowdown in rate increases where changes have already taken place, many underwriters believe a further correction is required to ensure the market remains sustainable. She explained that the first signs of a transitioning D&O market were seen in June 2018, with US direct listed risks domiciled overseas, particularly in the life science sector, initially feeling the pain. This year, attention has turned towards traditionally lower-rated UK retail risks with sectors such as mining, third-party service companies and technology-centric firms more exposed than others, the broker added. Similarly, certain territories, such as firms domiciled in the US and Australia, as well as Colombia-based insureds, are subject to greater insurer scrutiny, Ms Cheung explained. Elke Vagenende, head of Willis Towers Watson’s (WTW) western Europe region for finex, said that while the London market has been hardening at an accelerated pace, with some insurers withdrawing capacity completely, there has been a different and more varied environment across Europe. But the European D&O market is in a state of change as insurers try to address profitability by increasing pricing, revaluating terms and conditions and cutting capacity, she added. “There have been pockets of hardening but this is not consistent and [there are many] variations in pace across the region. It also varies across industries: mining, pharma, or those clients with significant US exposure have seen the strongest rate increases and reduced capacity,” she explained. According to the broker, insurers in Europe have started to re-evaluate their D&O exposure on an individual risk basis, with many cutting their maximum capacity from €25m to €10-€15m. But she said that although there are variances across the region, there currently remains enough D&O capacity for the majority of European clients. Coming into January renewals, the broker stressed there is still is no uniform approach across Europe, with “further discipline around the capacity employed and evaluation of wordings” likely. Ms Vagenende said she expects the recent trends in the European D&O market to continue into 2020, as insurers attempt to address “long-term underlying issues”. But she warned insurers that attempts to correct any market in just one renewal cycle create problems for insurance buyers and their brokers. “This is difficult for clients to digest and for internal stakeholders to buy into,” said Ms Vagenende. Insurers paint a similar picture to brokers about the state of the D&O market for European and multinational companies. Geraud Verhille, head of financial lines at AIG UK, said “we are in the midst of a correction in D&O markets across the world”, with hardening starting in the US ahead of the UK and Europe. He said the situation is particularly acute for commercial D&O. He said market hardening “accelerated” in the first half of this year, with current dynamics likely to continue “for at least another full cycle.” Adding: “I think the market will take stock at the end of 2020 to determine where it stands and what the future direction should be.” While things have moved more slowly in Europe than other markets, Mr Verhille believes the coming January renewals could get difficult for buyers. “The 1/1 renewal date is a big part of the year for Europe. While some European markets have lockstepped London, others are only really now starting to make the necessary corrections. As they are starting later, these are likely to move quickly and dramatically to make up for lost time on 1/1,” said Mr Verhille. He confirmed there has already been a contraction of D&O capacity across global markets, adding that most carriers are reviewing their capacity deployment, with some opting to exit the line of business. Mr Verhille said AIG itself has simply been looking for a return to “price adequacy with commensurate remuneration on capital deployed”. He said this is affecting “price points and the extent of capital deployment” at the insurer. Mr Verhille added that a combination of extremely soft pricing stretching back as far as 2005, together with a rising trend of litigation, an overflow of capacity, broadening of terms beyond the original core intent of protecting individual directors and officers, and increased cost of doing business reached a critical point in 2018 – making market change “inevitable”. As such, the UK D&O market has been hardening across the three key segments, he continued. The US-traded public companies segment grabbed the headlines, predominantly due to the meteoric rise of securities class actions, while market hardening for the non-US traded public companies segment has been slightly lower, said Mr Verhille. But the latter is now seeing price increases in excess of 30%, he added. Meanwhile, price rises in the private company segment – where key exposures include bankruptcy, health and safety issues, company claims against individuals and shareholder disputes – have been in the high single-digit range, explained the insurer. Hilda Toh, Chubb’s financial lines manager for UK and Ireland, said “it is really challenging” for multinationals to find D&O capacity and an insurer that is able to cover their entire footprint. She added that D&O rates for UK clients are “going up and have a long way to go”. In addition to rates, wordings are being addressed and capacity is an issue, the insurer continued. In the UK, insurers have withdrawn from specific D&O market segments such as the pharmaceutical industry, she added. “Some wordings are not being as widely supported, or supported at all, because they were just too broad. So along with price, wordings need to be sustainable in the long term too… We are able to change wordings that we think are more appropriate for where we are in the market cycle. A year ago, we might not have been able to apply these changes,” said Ms Toh. Adding: “The numbers for us just don’t add up, with decreasing rates and increasing frequency and severity in the UK D&O market. We are speaking purely about rate adequacy at this point so that we can support companies when they need us. The claims are hitting both small and large companies,” she added. Kyle Bryant, Chubb’s head of financial lines for continental Europe, said one consistent across all D&O markets is ten years of decreasing prices, alongside increasing exposures. “For example, the evolving regulatory environment and new class action laws across the EU to multinational exposures. With the recent history of increasing exposure and a down D&O market in general, there is a need for rate,” he said. Mr Bryant explained that the state of the D&O market varies county by country across continental Europe but, overall, rate increases are “either already being seen or may be expected for the next 1/1 renewal cycle”, which covers the majority of European buyers. “You might see a higher rate in some countries that have perhaps had a higher insolvency rate for the past five years,” he said. But he added that market correction is also showing up in appetite changes, deductible increases and wording changes. “In general, some companies in some markets may not see a blanket increase of say x or y percent sustained over a two-year period. But certain industries may see an extreme shortage of capacity or changing terms,” said Mr Bryant. He stressed that the changes are about price adequacy and delivering stable and sustainable future pricing for clients. “This is about a correction in the market rather than insurance companies haphazardly pushing pricing,” he said. Mr Bryant said Chubb will still underwrite each client on its own merits, but wants to be “very clear” about what is happening in the market in terms of risk and price of cover. Yoel Brightman, underwriting manager of international financial lines and management liability at AXA XL, said both the US and international D&O markets have required, and seen, “significant corrections” in the last year, but warned “there is still some way to go.” He said it is hard to call how long the D&O market correction will need to last, but thinks it will likely continue until the larger insurers start posting a profit in this line of business. “At present, rates are starting to better reflect the frequency of loss, but returns are still generally poor as claims on prior years continue to deteriorate. Market players continue to drop out seemingly every week and I don’t see this changing any time soon,” he said. D&O rates in the US domestic market have been getting progressively stronger in 2019, with increases of 20% or more in the highest-exposed areas, explained Mr Brightman. Things are a “little more complicated” outside the US, and “larger corrections” are required in some areas where rates were depressed further in the soft cycle, he added. “Rates across the international markets are moving but in a less configured manner – with corrections taking place for the past few years but not in all regions and with focus on companies with US-traded securities or those in the life sciences and pharmaceutical industries,” said Mr Brightman. The Australian market has seen rate increase close to 100% while, until now, continental Europe has seen less hardening despite there being an increase in exposure and several potential large losses in the pipeline, added Mr Brightman. He explained that AXA XL will be “prudent” with its D&O capacity deployment, given an increase in the number of severe claims. However, Mr Brightman explained that the insurer’s general appetite “remains unchanged”. WTW’s Ms Vagenende said it is “pivotal and therefore recommended” that clients engage early with brokers to ensure that any D&O capacity issues can be mitigated through access to available markets across the globe. She said it is also important for buyers and brokers to focus on what areas of cover are essential as the market toughens. “Questions such as: ‘Is the D&O cover to protect the company’s balance sheet or to protect the individual directors?’ are being asked,” she explained. It is also becoming increasingly important for buyers to engage early with insurers and value long-term insurer relationships, said the broker. “Financial lines are long-term risks, so a long-term relationship is valuable and worthwhile. Therefore, when approaching renewals, buyers should engage early; build and leverage existing market relationships; and consider a longer-term view and market partnership,” she said. Marsh JLT’s Ms Cheung advised insurance buyers to focus on any positive claims records and work with their broker to get the best results in this difficult market. Ms Cheung also advised clients to analyse their total risk premium spend against claims payments per carrier and, if profitable over time, use this data to present the risk. In addition, she said risk managers should reach out to other lines of business, such as property and casualty, where there may be a broader carrier relationship and loyalty may be rewarded.

D&O market set to harden further with concerns over capacity shortfall

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