Easier D&O renewals forecast if risk presented properly

Risk managers will hopefully have a less taxing experience during coming D&O renewals as capacity is returning to what was an extremely difficult market at 1 January 2021 and the market appears to have hit the top of the “pricing bell curve”, according to David Ritchie, managing director and head of A J Gallagher’s management liability business based in London.

In a new report on the state of the D&O market, Mr Ritchie says that while we cannot completely ignore the continued uncertainty in the D&O space and wider world, the market is “ready to move on” from Covid-19.

Mr Ritchie says that as we enter the second half of 2021, the broker wants to continue focusing on the way its clients control and present their risk to the market. This will be critical as customers and brokers ready themselves for some more tough conversations with insurers about removing the uncertainty reflected in pricing across some management liability programmes, he says.

But risk and insurance managers who are properly prepared can expect a more positive experience this year, based on A J Gallagher’s report.

“Our experience so far this year suggests we are at the top of the pricing bell curve, with new excess market capacity applying some much-needed relief to overall pricing. Whilst primary policies remain difficult to replace or move, some primary insurers still need to take corrective measures, the appetite to compete for excess Plc business is clear to see,” writes Mr Ritchie in his executive summary to the report.

Europe’s risk and insurance managers are well aware that for the past four years the London and wider international market has been an extremely challenging place to do business, particularly for D&O and management liability risks. Mr Ritchie says that it will remain challenging but there are positive signs.

“Insurers need to be ready to compete for their existing business, on accounts where the rate has been corrected through an unprecedented year; any chief underwriting officer implemented edicts around ‘not renewing at’ or ‘no decreases’ will almost certainly see insurers lose quality business,” he says.

“Whilst the distant bugle of the excess layer cavalry is audible on the horizon, we are still realistic about the clear and present challenges facing our clients. The [UK] Chancellor remains adamant about redressing the balance of the public purse, and a lifting of lockdown does not necessarily mean an instant return to economic recovery. As furlough schemes lift, the fallout will start to be felt, and as we have learned from the last soft market, not just in the UK, but in many developed nations, the tail for D&O claims is a long one,” continues Mr Ritchie.

“As we have stressed before, a quiet accident year (in terms of notifications) coupled with historic rate increases for insurers does not necessarily equate to a profitable return, and the long-tail nature of D&O claims means payments for historic investigations (as far back as 2013) are still being made. Coupled with impending changes to audit reforms and the turbulence caused by UK IPOs and SPACs/de-SPACs – the outlook remains uncertain for the UK economy and its company directors,” he adds.

Australia has been another difficult market for D&O insurers and their clients, but at mid-2021 there is more cause for optimism with signs that carriers are willing to trade on new opportunities and, in many cases, on more adventurous programme structures, says A J Gallagher.

“Premium levels are causing many large listed companies to drop side-C (and sometimes side-B) completely and take the balance sheet risk. Some small caps just cannot justify side-C premium/retention levels,” states the broker.

The US D&O hard market is also improving. US D&O prices continue to rise, though not as much as in 2020. “Capacity continues to be examined carefully. Although most cuts in capacity took place in 2019 and 2020, there may be a few more to come. In the toughest sectors, IPOs and SPACs will often see a primary $2.5m layer, $15m layers may be economically unsustainable at this point for excess D&O carriers,” states the report.

The D&O market in Canada began hardening much later than the US and, as such, A J Gallagher expects the market to remain hard throughout 2021 before seeing some moderation in 2022. “Public and private organisations that saw rate increases of 25% or higher in 2020 should expect another round of increases in 2021,” predicts the broker.

In South Africa, capacity continues to be largely available for locally listed companies, it continues. “But we continue to see submissions still coming into the London market as local carriers look to cut back the total capacity they are willing to deploy on any one risk,” it adds.

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