“Put simply it was a mess,” said Elisabeth Groehe (pictured above), IQUW’s underwriter for professional lines.
Groehe was responding to a question from Insurance Business about why 2018 was arguably a watershed year for directors and officers (D&O) insurance, particularly in Australia.
“It was a culmination of insurers not adequately pricing for the risk they were taking on over a number of years,” said the UK-based underwriter.
Groehe said retentions were “eye-wateringly low” and terms and conditions were incredibly broad.
“Insurer portfolio management discipline was non-existent as carriers’ line size distribution was way out of kilter with the size of their portfolios,” she said. “All of this while the frequency and severity of securities class actions and other claims in Australia was reaching unprecedented highs.”
Groehe said the situation became unsustainable and insurers either pulled out of the market completely or severely reduced the availability of capacity.
“So terms and conditions changed drastically,” she said.
2018 was an Australian D&O turning point for other reasons.
“Historically the London market has always written Australian business and has been a key partner for many insureds for a number of years,” said Groehe. “However, as the market conditions changed in the local Australian market in 2018, particularly for public company D&O, a significant proportion of business was being placed in the London market by insureds that hadn’t previously bought their insurance here.”
Her firm estimates that more than half the companies on the ASX300 purchased insurance from Lloyd’s and London-based insurers, rather than locally based insurers, for the first time.
In 2023, the impacts from 2018 and other challenges continue to make D&O a “dangerous game.”
Currently, the D&O market globally, said Groehe is seeing “stark reductions in rates” combined with some insurers increasing line size to make up for lost premium.
“This can be a dangerous game to play,” said Groehe. “It increases volatility within a portfolio with the number of Securities Class Action (SCA) filings in 2023 already outpacing 2021 and 2022 in the USA.”
IQUW, she said, following a full year of steep rate reductions since H2 2022, believes “discipline needs to be restored.”
Gallagher, the global brokerage and risk management firm, recently reported that, over the past 12 months, 32 carriers have entered the D&O market. In an interview with IB, the brokerage attributed the boom to factors including relatively favourable rates, decreasing claims and insurers’ improved retentions.
“Alongside an increase in capacity, there was also an inpouring of private equity into the marketplace,” said Boston-based Jennifer Sharkey, the firm’s managing director for management liability.
However, the rate decreases that resulted, she said, have now significantly slowed. “The much more competitive programs and products are seeing smaller decreases, while clients who are entering the renewal phase from coverage written before this capacity boom are witnessing significant shrinkage,” said Sharkey.
Steve Bear, Gallagher’s London-based executive director of financial and professional risks, sees a “strange paradox” in the current D&O insurance market.
Bear told IB it’s now the toughest time to be a director or an officer at a company, or a D&O insurer, but inversely, also the best time to buy D&O coverage. He said the travel, tourism and leisure sectors were seeing “significant” post-COVID premium decreases.
From the perspective of D&O policy holders, a recent WTW report said that, globally, regulations continue to be a top risk concern. However, the report said Australia’s directors are less concerned than global counterparts.
“While between 36% to 60% of responders from GB, US, Europe and Asia considered a regulatory breach as a very or extremely significant risk, that rose to 76% in Latin America and fell to just 8% in Australasia,” said the report.
WTW said recession fears have not yet caused a contraction in the market.
Despite the challenges, IQUW recently launched an offering with bespoke wordings for the Australian D&O market to make it easier for Australia to transact with London.
“Compared to an all-encompassing international form, we have used bespoke language and coverage for the Australian market,” Groehe said. “We have included, as standard coverage, enhancements and extensions to provide additional support in recognition of the current litigation landscape.”
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