The directors and officers (D&O) insurance market in the United States gets more challenging by the day. Pricing is steadily rising, coverage is narrowing, and underwriters are no longer willing to provide certain coverage enhancements that were previously available. This was the case at the offset of 2020, and these challenges were only exacerbated throughout the year – both from a D&O risk perspective and from the insurance market response perspective – by the global COVID-19 pandemic.
The coronavirus pandemic – and all the related health, social, and economic issues associated with it – added more complexity to corporations’ D&O risk maps. Companies had to figure out how to adapt to the pandemic and keep their employees and customers safe, while also navigating increasingly choppy financial waters. At the same time, insurance markets took their own financial hits from the pandemic. They became much more cautious in risk selection and capital deployment, and their underwriting behavior tightened up even more than it had been at the start of 2020.
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D&O underwriters are focused on two key things related to the pandemic, according to Sarah Downey (pictured), Marsh’s US D&O product leader. They’re looking at how companies handle the crisis financially, and also how they’re planning ahead for the foreseeable future. She commented: “D&O underwriters want to know how prepared companies are. They want to know what protocols they’ve put in place to deal with continued challenges over the next however many months. They want to know how companies are preparing to bring people back to work when things start to improve, and how that strategy might impact employee behavior. It’s not just about how companies have already been dealing with the virus; it’s about their preparedness for what is yet to come.”
This is where brokers can really help clients in articulating to the insurance markets how companies have responded to the pandemic, and what they plan on doing through 2021. A good brokering tip, according to Downey, is to ensure that clients understand the issues that are driving the hardening D&O insurance market, and also how underwriters will view them, as a unique risk, when it’s time for renewal.
“If they can understand the underwriters’ concerns specific to them as a company and more generally, and how those concerns are impacting underwriting behavior, then I really think companies will be in a good position to either use data or have enough information to support differentiating themselves in a challenging market,” Downey told Insurance Business. “With the market hardening, it’s also important for brokers to focus on building relationships. If you have a very strong relationship with a couple of key markets, it’s going to make it that much harder for those markets to either walk away from the risk or to really increase pricing so much that it would hurt the long-standing relationship.”
Brokers must also approach D&O clients with flexibility. With prices rising, coverage narrowing, and capacity restricting, more and more companies are looking at alternative risk transfer solutions to mitigate their costs.
“Every client looks at this differently,” said Downey. “We have clients who have transferred some of their D&O risk out of the traditional insurance markets and are now insuring it through a captive, while others are using D&O trusts. People are creatively structuring more traditional D&O insurance towers, using different mechanisms that previously weren’t very common, like coinsurance, for example. It’s not really an alternative risk transfer solution, but companies are now taking bigger retentions and taking on more of the risks themselves in an effort to save money, as opposed to transferring it all away.
“Companies and clients are being very creative and very forward-thinking, and we are constantly trying to work with them to devise solutions that help them to transfer their D&O risk, or to put it in some type of facility that they’re more comfortable with from a pricing and coverage perspective. But each company varies, and everyone is having different conversations and really looking at things very differently.”
