European D&O market set for further hardening as Covid-19 reinforces tough conditions

European D&O insurance buyers now face a hard market and should brace for further increases at renewals, brokers and insurers have warned. Elke Vagenende, head of western Europe for finex at Willis Towers Watson, told CRE that European risk managers are experiencing a “hard market” for D&O insurance, with double-digit rate increases now the new norm in most countries. Some more challenging industries or clients with a claims history may see increases exceeding 100%, she added. “Italy and Spain are hit hardest but we also see a significant rate correction happening across the Nordics, where historically rates were quite competitive,” said the broker. At the end of last year, there were signs of hardening in the European D&O market, but many countries were yet to experience significant increases. However, the situation has changed dramatically in the first six months of 2020. According to Marsh, D&O pricing increased by 100% in the UK during the second quarter alone, with pricing up more than 50% in France and 25% in Germany and Italy. No company can escape rate increases, according to Nicky Stokes, head of management liability and financial institutions at New Dawn Risk, a specialist liability broker in London. The D&O market is adjusting for 15 years of reductions in one go, which means substantial increases, she told CRE. “We have seen everything from 15% to a whopping 300% to 400% increase,” she said. Companies with US exposures, where there has been a record number of securities class action claims in recent years, are some of the most affected. Sectors such as retail, hospitality and airlines are also now not in favour and renewals are exceptionally difficult, Ms Stokes said. Covid-19 has accelerated the hardening trend, according to Ms Vagenende. “This is especially true for certain sectors badly hit by the pandemic, such as transportation, especially aviation, and the leisure industry. For some other industries that were already challenging, such as pharma and mining, we have seen a further hardening. At the same time, we see that the long-term economic outlook concerns underwriters across Europe as they are worried about an increase in insolvencies and are starting to take this in account,” she said. The US and Australia have seen large increases in D&O during recent years but Europe is catching up rapidly, continued Ms Vagenende. “While we have not seen situations like in Australia yet, for some sectors it is heading that way. IPOs for example are very challenging, especially if this involves US or pharma, as market capacity has dried up and there are hardly any markets available. The rates for these kinds of risks are eyewatering,” she said. Ms Stokes believes European buyers will see further increases in the price of D&O insurance. “I don’t think we have seen the last of rate increases in this space. Bearing in mind we have 15 years of rectification to do. Covid-19 certainly hasn’t helped an already distressed class. I see this carrying on well into 2021 and beyond. Insurers are also contracting their line sizes and capacity deployed, and not writing certain sectors anymore. Even with the high rate increases being achieved on renewals, a number of insurers are not accepting new business at all,” she said. The hard market is here to stay for a while, agreed Ms Vagenende, who believes clients should take this into account when planning budgets for next year. “If you look at the underlying underwriting results for most insurers, it does not make for a great picture. Combine this with the uncertainty related to the pandemic and more long-term economic uncertainty, and I believe this hard market is here to stay,” she said. Covid-19 aside, D&O probably represents one of the biggest headaches for risk managers at present, according to Clive Thompson, deputy chair of the IRM. “We’re seeing premiums double for the same limit. Price rises can be even higher depending on industry or exposure, for example the extractive industries or those particularly affected by Covid-19, retail or travel for example,” he told CRE. Explaining increases in D&O insurance to the board is always going to be hard, said Mr Thompson. “Directors have to juggle their understandable desire to be financially protected from personal liability against a need to do what is best for the business, which might not be to continue to buy high limits in the face of this market. So this does drive a hole in the budgets and means risk managers need to explain very carefully the ways that some of the coverage may have been lost as terms have tightened,” he said. “It’s also a pretty difficult call to figure out why you have been loyal to your ‘partner’ insurers for a long period of time only for those ‘partners’ to, in some cases, disappear entirely from your renewal,” Mr Thompson said. Insurers are also predicting further price increases for European D&O at renewals. “Across Europe we have seen the D&O market hardening both in respect to premium, terms and conditions, and available capacity,” said Ralph Brand, global head of casualty, financial lines and cyber at Zurich. “All indications are this will continue through the remainder of 2020 and into 2021 based upon what we are seeing in the all-important 1 January 2021 renewal season,” he said. “Companies in certain industries, those with US exposure and/or claims experiences, are seeing the most challenging renewals even if they were subject to significant changes at the previous renewal. No market in Europe is isolated from these changes and we encourage early dialogue to avoid gaps in continuity of coverage,” he added. Richard Allen, head of professional lines for the London market and Europe at Sompo International, suggested that insureds’ D&O buying patterns may change – with less entity cover, Side-A only and increased retentions. “Capacity is dropping, limits that may have been purchased previously will be difficult to achieve. Until the true cost of the previous 15 years and the pandemic/recession is borne out, the uncertainty will mean that insureds will face challenging market conditions for the foreseeable future,” he said. Mr Allen argued that the hard market is the result of 15 years of rate decreases, broadening cover, surplus capacity and huge appetite from carriers to grow their D&O portfolio. “These factors, plus some large claims and the impact of social inflation, have contributed to what is now a hard market. The pricing was unsustainable, exposure and wordings were not being correctly analysed or priced, and a glut of claims means that carriers are withdrawing, prices are going up, coverage is being restricted and we are seeing the hardest market arguably in the last 20 years,” he said. “Add to this the pandemic, a recession and the inevitable insolvencies that are to follow and the D&O market will have more difficult years ahead, with pricing levels being required to remain at least at this current level for the foreseeable future,” Mr Allen said. D&O claims frequency and severity have increased on a global basis, according to Mr Brand. “Policies’ wordings became broader and the regulatory environment more focused on the liability of directors and officers. Increased shareholder activism, growing litigation funding industry and ever-increasing legal expenses have all contributed to the need for global changes across all segments,” he said. Continental Europe is not immune from the challenges faced in the London market, with many large global European entities also subject to the US legal system, explained Mr Allen. Merger objection lawsuits involving EU and US parties have seen a sharp increase, while regulatory activity and oversight is far greater than it has ever been, he said. “Claims activity in Germany, in particular, is on the rise. The same can be said in the Netherlands and the rise in collective actions there. A wave of scandals has also hit Europe recently with accounting fraud, breach of environmental standards and money laundering high-profile cases, which are expected to result in large D&O losses. The market dynamics of rate and capacity certainly hold true for the continent as well. The pandemic will cause a recession and insolvencies, meaning the same corrective action as the London market is required,” Mr Allen said. “With any recession and economic downturn, it leads to increased litigation. The pandemic and the expected insolvencies are no different. Claims activity will certainly not drop and there is no doubt that this should continue to reinforce and prolong the hard D&O market,” he said. Covid-19 has created ongoing exposure for directors and officers, agreed Mr Brand. “We expect increased exposure will be driven by D&Os’ and companies’ actions undertaken to manage the pandemic situation, grant workplace safety, implement risk management and contingency plans, manage the financial impact on the company business and financial position, and all the disclosures related thereto, as required by regulators, investors and other counterparts,” he said. Brokers and insurers are advising risk managers to begin their next D&O renewal early. “With insurers reducing capacity, getting additional markets on board will require time and lots of negotiation,” said Ms Stokes. Ms Vagenende suggested companies start negotiations at least four to six months prior to renewal. “Time is really of the essence and this will be especially true for those buyers with 1 January renewals. Early engagement allows time to consider alternative options in programme structure and perhaps alternative markets,” she said. Mr Thompson suggested buyers look to all available markets to place the risk, including the use of captives. “London is a ‘hard’ market at the moment with capacity withdrawing and terms hardening, so other centres should be looked at. And that can be either as a direct placement or, with very careful construction, potentially through a captive, or a PCC-type vehicle to access reinsurance – but that brings its own risks that must be analysed too,” he said.

European D&O market set for further hardening as Covid-19 reinforces tough conditions

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Related Articles