The directors & officers (D&O) insurance market in Canada is tightening up at record pace. In the past year, D&O rates have skyrocketed for both public and private companies, and many insurers have started restricting the amount of capacity they’re willing to put up against certain risks.
There are multiple factors driving these hardening conditions. Over the past few years, insurers have dealt with an uptick in the frequency and severity of D&O losses, while premium pricing remained relatively soft. This dramatic change in the market – some public companies are seeing D&O rate increases as high as 50% - is a corrective action after years of potentially inadequate pricing. It also coincides with a sustained low interest rate environment, which is impacting the industry’s ability to make strong returns on underwriting and investment income.
In addition, insurers are concerned about the wide range of emerging risks that directors and officers face, including uncertainties around the ongoing COVID-19 pandemic, heightened risk of bankruptcy, the ever-threatening cyber risk landscape, and politics/Environmental, Social and Governance in the boardroom.
The first thing underwriters will focus on when considering a D&O risk is a company’s financials, explained Andre Linsky, senior underwriter - Management Liability and Financial Institutions at CNA. He told Insurance Business: “We want to ensure a company has enough liquidity to perform through the next 12 to 18 months. We also need to know a company’s debt position. If their debt is expiring in the near future, we need to understand how they’re going to refinance it.
“We’re also going to look at how a company has been impacted by COVID-19, what their projections are for the coming year, and how they plan to recover if they have been adversely affected by the pandemic. There’s still a lot of uncertainty around the pandemic, which makes it a little bit more difficult to underwrite a company’s financial solvency.”
Certain classes of business, such as aviation and hospitality, have been hurt more severely by the pandemic than others. The airline industry saw revenues dive to record lows in 2020, and there’s no fast reprieve on the horizon. Many countries, Canada included, are now ordering mandatory COVID testing and hotel quarantines for international air travellers, which is deterring passengers and leaving airlines in uncertain economic territory. As a result, it has become very difficult for airlines to secure affordable D&O coverage.
“For directors and officers, one of the main COVID-related exposures outside of financial hardship relates to personal protective equipment (PPE),” Linsky added. “Companies have to protect their clients and their employees by following public health guidelines and providing appropriate PPE – and they should conduct spot checks within their workforce to ensure PPE is being used properly. If a company fails to meet the required health and safety standards and an employee or a client is exposed to the coronavirus, the directors and officers could face lawsuits, especially if someone falls sick.”
Beyond financial risk and management liability exposures related to the COVID-19 pandemic, directors and officers are also contending with a cybersecurity threat landscape that is constantly evolving, with ransomware attacks and data breaches sharply on the rise. This is an emerging risk that D&O underwriters are now starting to exclude from traditional D&O policies, especially as cyber extortion and ransomware demands creep into six and seven figures, sometimes threatening entire D&O coverage limits for small- and medium-sized firms.
Even when cyber exposure is excluded from the D&O policy, the risk is not removed completely, Linsky pointed out. “If a company suffers a cyber breach that costs excessive amounts of money to rectify, the concern is that this will impact their financial solvency - a risk that traditionally falls within the D&O market. These are all things that underwriters are considering in the hardening D&O insurance market.
“The best way for brokers to help their D&O clients in a hard market is to submit complete submissions,” said Linsky. “They need to obtain a complete picture of a company’s operations related to COVID-19. How has COVID-19 affected the company’s operations and how is it planning for the future? They also need to make sure the financials they present are up to date. We’re still seeing financials from pre-pandemic days, while we are now living in a very different world. The more information they can pull together, the stronger their submission will be.”