European D&O market hardening set for 2020 as companies struggle to complete programmes

The European D&O market has hardened throughout the year with some companies now struggling to find capacity for large or difficult risks, according to Elke Vagenende, head of western Europe for FINEX at Willis Towers Watson (WTW) who expects this trend to continue throughout 2020.

This could lead to budget problems for any risk managers that have not yet taken this message onboard, added the broker.

Her comments are backed up by Clyde & Co that said European D&O insurance buyers face further rate hardening in 2020 and could find a squeeze on available capacity as established players either exit the market or impose limits.

Ms Vagenende told Commercial Risk Europe that outside of Australia, the UK is probably the hardest D&O market globally. Even companies without any D&O losses and “red-flag” risks – US exposure, any IPO or operations in the pharma, mining or tech industries – are doing well if they secure 25% increases in premium at renewal, said the expert. Companies in the UK market with any combination of these riskier factors are “really struggling” and some are now finding it hard to complete their programmes, she added.

“In the summer renewals we saw the increases, but now it can be hard to find an insurer to cover the risk. I have not seen that since 2008,” said Ms Vagenende.

Although not as bad for buyers, the European D&O market is now hardening “quite steeply”, she continued. The broker explained that until the summer, Europe was a mixed bag with rates generally flat to up 5%, but now general increases are between 5% and 10% with some countries harder than others.

She said Spain and Germany are difficult for buyers with rates of plus-10%, and things are picking up in Scandinavia where there are a lot of big pharma and tech companies.

The exception is France, where even heavily exposed companies are renewing D&O at the same price or up just 5%.

But any company across Europe, except those operating in France, with one of the five red flag risks faces “very big” D&O price increases and there are growing problems to secure enough capacity, said Ms Vagenende.

“We have struggled for capacity on some of the large risks. If you are a tech company with a US listing and want a big limit, you are going to struggle to find €200m,” she explained.

The expert said this is because most carriers have reduced their capacity on the back of problems that have been storing up in the D&O market for the past ten years.

“It is possible to get €25m in D&O cover from an insurer but only if you have a long-term relationship and maybe the insurer writes other lines for you. Most carriers have reduced to €15m or €10m and the biggest issue is on the primary side. Primary markets are very difficult,” said the broker.

Ms Vagenende also fears that because D&O is a long tail line with underpriced business still to filter through, the market hardening will continue “for at least the whole of 2020”.

“At the end of 2020 we will have to have another look but I don’t see things changing before then. I think after 1 January renewals, the message will have got through to the buyers. But there is no new capacity coming in as was the case in previous years. We are now seeing capacity being withdrawn – either completely or reductions. If everyone reduces their capacity from €25m to €15m, that’s a big loss for buyers,” she said.

To try and fill the gaps, Ms Vagenende said WTW is accessing other markets for European buyers such as Bermuda, the US and some homegrown Scandinavian markets. It is also leveraging increased options from reinsurance companies that are stepping up for some large corporate risks if the price is right, the broker explained.

Another response to problems caused by the hard D&O market is for insureds to restructure their programme and increase deductibles, which on Side-C cover are now often €1m and up to €5m, she continued.

“One option is to buy less A, B and C cover and do more Side-A only, which is cheaper. Or you just buy less and accept more restrictions, which is the reality for a lot of risk managers now. We are also seeing co-insurance come back,” said Ms Vagenende.

She said there has also been growing interest in transferring D&O risks to captives.

The broker added that well-informed, sophisticated risk managers who have a good relationship with their insurers and understand the D&O market are less likely to have big problem at renewal. But she warned there are still many companies that have not truly grasped what is going on in the market and could end up with a lack of budget to transfer the risk.

“There is a proportion of companies where risk managers are so used to the procurement mode of buying insurance over the past ten years and last-minute deals, where the message hasn’t sunk in. I think this is because people think things are not going to affect them and it is only the red-flag risks that are facing difficulties, but the reality is the other risks are not plan sailing,” said Ms Vagenende.

“The big problem with this is there is going to be a mismatch between their budget cycle and what they will need to cover their D&O risks. The budgets are likely already set for 2020 and if they haven’t budgeted for increased pricing, there are problems,” she warned.

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