The new emerging risks changing the D&O landscape

The risk landscape of D&O (directors and officers) insurance is changing.

But as these changes are not industry specific and with companies today operating in a more complicated regulatory environment, finding a “one size fits all” solution is no easy task.

On top of this is the issue of new emerging risks such as the “MeToo” movement, data privacy regulation and the unregulated nature of social media. These are just some of things adding an extra layer to loss and litigation for firms, as well as the frequency, cost and severity of D&O claims and investigations.

Chubb’s figures show that over the last 15 years up to 2017 its UK&I D&O rates have gone down by 48%, and although deductibles have got smaller, policy wording has become much broader.

All this has led to a much bigger problem with the claims trend being tipped in an unfavourable direction for many insurers and therefore making it potentially unsustainable. 

This was the message of Chubb’s financial lines manager for the UK and Ireland – Hilda Toh, she told Insurance Times that rates started increasing last year which left some brokers and clients questioning why their premiums had gone up.

D&O liability insurance is cover that offers financial protection to the director, partner or officer of a company, and it is designed to cover the cost of claims for compensation made against the insured individual. 

It covers the claim made against the business’s directors and key managers (officers) for alleged wrongful acts including breach of trust. It usually protects the company as well as accounting for legal fees and settlement costs. 

“We are seeing D&O rate increases in the market and that can be quite difficult for a lot of clients to understand, particularly among those with no claims. But the essence of this comes down to the basic mechanics of the insurance market – the money collected in the pot is not enough to pay for all those other losses. There are more claims in the market and the quantum of these have gone up in general, she explained. 

“The frequency of claims is also increasing and this is partly due to the changing regulatory environment in the UK. In addition, we are seeing other influences having an impact which simply did not exist before, such as social media which has helped drive the mindset that when something goes wrong, someone must be held accountable.”

What’s changed?

Chubb listed the following changes that are affecting D&O insurance premiums:

• Rising claims costs: Claims are becoming bigger and increasingly more expensive to defend and therefore settle
• Increased D&O litigation: This is reflecting a trend towards culpability of the individual
• Increase of securities class actions: The figures are going up as does the claims quantum
• Policy wording coverage: This has broadened materially throughout the soft market
• Premium reductions: Over the years’ premiums have reduced
• New and emerging risks: Things like social media being unregulated present new pitfalls for firms 
• Increased regulatory activity and scrutiny: Investigations are now large, global and long lasting and showing little sign of diminishing

Toh said: “As an industry we need to fix this.” 

On discussing why regulators across different sectors have been forced to step up and take action, Toh said: “D&O wordings over the last 15 years have broadened significantly in cover alongside falling premiums.”

Ultimately, she continued, it becomes “unsustainable for the industry and this is why rate adequacy is so important”.

The benefit of rate making is to ensure insurance companies are setting fair and adequate premiums or rates, given the competitive nature of the market.

She also said that other claims risks such as bullying, harassment, sexual allegations and company misdemeanors were becoming more prominent. Corporate insolvencies were another significant driver.

“If you have a big company that goes insolvent and you have hundreds or thousands of people losing their jobs, pensions pot and life savings someone has to pay. Ultimately from an insurance perspective that could lead to a claim under D&O policies.

“D&O policies exist for good reason but there is now a general market mismatch between premiums, broadening policy wordings and the increase in claims volumes and the nature of those claims.”

This is due to the things now being picked up in the policy that previously were not, this is due to increased regulatory activity and policy wording broadening. Overall Toh said that the firm is seeing a much more litigious environment because of social media. 

If this does become unsustainable insurers might be forced to shut some business potentially, Chubb is trying hard to turn the market despite the circumstances. 

Placing risk

On top of this brokers are starting to see difficulty in placing certain risks– this include claims such as bullying, harassment, sexual allegations and company misdemeanors.

Toh referenced the abolishment of the employment tribunal fees in July 2017 which in turn made it easier to bring a claim to court.

The issue being social media is unregulated, it means that anyone can publish anything online regardless of whether it is true or not. It is therefore difficult to measure and far too easy for misleading information to be published. 

But this is why people buy D&O policies, Toh reiterated.