Against the odds in these litigious, recessionary times, directors’ and officers’ liability insurance is getting cheaper for many companies. Sue Copeman gets the full picture
Seemingly against the odds in these litigious and recessionary times, for many companies directors’ and officers’ liability insurance (D&O) is getting cheaper. Sue Copeman interviews Matthew Rolph and John Batch to get the full picture
When the recession started to bite, there was much talk of the impact for directors as regarded possible claims. The need for companies to cut down on staff and report falling profit margins suggested that both employees and shareholders would be looking for possible redress in the law courts. So far it hasn’t happened.
Matthew Rolph describes the current situation as ‘an incredible disconnect’. “The world is so much more volatile economically so why are premiums still going down? Frankly, outside of some high profile cases, the claims are not materialising,” says Rolph. He points out that there is a significant increase in the frequency of reported possible claims, largely due to more investigations from regulators and employees looking to litigate. “But the big catastrophe claims are still fairly few and far between,” he concludes.
John Batch highlights a new trend in notifications – regulatory and other claims coming in from areas such as Latin America where historically notifications have been low. He says: “This may be because there is greater awareness of the need to notify claims - or simply there may really be more potential claims arising than before.”
The increase in reporting of potential claims has had an effect on the primary insurance market – the underwriters who insure claims after a company’s deductible so are pretty much involved from the ground up. The competition is lower in this sector because of the administrative claims handling burden. “But once you move to the excess insurance community it’s an incredibly competitive market,” comments Rolph.
Batch points out that there have been a number of new players in the D&O market which have added to competition. He cites Argo Group, Navigators Group and W R Berkley Corporation. And he believes that this increased competition for the excess layers is driving down the primary market rates.
Rolph puts the situation into perspective. “Many of our clients were expecting their premiums to be going up for D&O or to be flat at the best. The reality is different. We saw some stability in rates earlier in 2009 and some clients were concerned about the security of their insurers and the potential effects of failures. But the realisation that insurers have not toppled over has been accompanied by considerable insurer interest in D&O and double digit price decreases in the third quarter of 2009 which we expect to continue.”
Demand for cover has not decreased. Rolph explains: “Directors and other executives are more sensitive to risk than they were in the past. Everyone can see that in the current environment regulators and politicians are holding individuals accountable so people are far more acutely aware of their personal vulnerability. With these unexpected premium decreases we are seeing many clients buying more insurance rather than merely banking the saving.”
Another sign of the times is that the demand for so-called ‘side A difference in conditions’ cover (a form of excess cover that can provide a high limit to protect directors’ personal assets and insure directors for claims that might not fall within the primary insurance policy) has increased substantially. According to Rolph, purchases of this insurance now account for 50% of the premium spend rather than the nine per cent of some two years ago.
He explains: “One of the benefits is that it provides additional cover in the event of the insolvency of an underlying insurer. That was of interest to people understandably in the back end of 2008 and the beginning of 2009. Another plus is that there is no exception for pollution. Although it’s hard to pinpoint specific cases of claims, many directors are far more aware of their personal liability with respect to environmental liabilities. And that cover is cheaper now than it was two years ago, when there were only a couple of insurers offering it. Now there are probably 20 in this market so the cost has gone down.”
Rolph believes that the key going forward is that insurers will need to demonstrate that they have a robust underlying methodology when the claims do materialise. “If they are not able to demonstrate that to their management or to their reinsurers I would expect to see them leave the market.”
He also adds a warning note for the future. “The consequences of the economic environment have been that many countries or local state authorities need to balance their books particularly relating to areas such as tax. I think we are going to see a far greater scrutiny of tax issues with regulators from different countries collaborating to investigate and bring cases.”
