The past, present and future of the D&O market

From the pandemic to the threats of artificial intelligence and more

The past, present and future of the D&O market

Professional Risks

By Desmond Devoy

This article was produced in partnership with CNA Canada.

Desmond Devoy, of Insurance Business Canada, sat down with CNA underwriter Ethan Cooper to discuss the past, present, and future of the D&O space.

The COVID-19 pandemic may largely be over, but its impact is still affecting the D&O insurance space.

“Before the pandemic, the D&O sector was a relatively client-friendly market,” said CNA Canada underwriter Ethan Cooper (pictured), albeit the market was already hardening prior to COVID-19; “We were pushed into a fully hard market during COVID-19 and then following the pandemic, a soft market.”

COVID-19 served to accelerate tightening as the marketplace became more challenging for public and private organizations alike – rates climbed, while capacity across a host of classes fell. Underwriters, in turn, wanted more detail about the health of organizations, and often insisted on higher retentions, regularly imposing exclusions too. It quickly became a difficult environment for both brokers and their insureds to navigate.

Spare a thought for the humble underwriters too – they found themselves awash with submissions.

“Uncertainty from the shutdowns shifted the D&O space to a hard market,” said Cooper. “The heightened risk for the insurance industry, caused by the pandemic, resulted in the average or general policy seeing increased premiums” even though, ultimately, claims activity did not end up increasing as much as anticipated.

Indeed that, ultimately, was the silver lining – things didn’t get quite as bad as anticipated. Cooper noted that there were around 15 new securities class action lawsuits filed in both 2019 and 2020 in Canadian courts – that number has only fallen since, to 10 in 2021 and eight in 2022. As such, in the past year, “we’ve been seeing a steep decline in rates in the publicly traded space,” he said.

The current state of the D&O market

Coming out of the pandemic period, capacity has been making something of a comeback.

“London markets are coming back to the Canadian space – and as a result of increased capacity or increased supply, it’s helping drive down premium,” Cooper said. 

Still, the market is not without its challenges, as Cooper highlighted - from ESG, to geopolitical and socio-economic changes. Even technological movements, like the emergence of AI, are presenting new risks, while supply chain issues still linger.

And, though some do not want to be reminded, COVID has not gone away.

“I’m optimistic the D&O market is going to continue stabilizing and that the market is prepared for any COVID uncertainties that may resurface this fall,” Cooper said.

The future of the D&O market

So what can we gauge from the past and present about the future of D&O?

Firstly, prices should start to stabilize.

“We’re going to be seeing stabilizing rates compared to previous years,” Cooper said. “We’re not yet approaching pre-pandemic levels and pricing. So things will begin to get more adequately priced.”

There are going to be new types of companies looking to take out policies too.

An increasing number of blockchain companies are also emerging, and seeking insurance coverage,” Cooper observed. “This presents a challenge for insurance firms, including CNA, where these types of risks are not a target class of business. It calls for a proactive response from companies to determine if insureds are getting involved in these types of operations and whether or not they are willing to take on related exposures.”

Another issue on the horizon, that comes with risk and possible reward, is the legalized cannabis market.

“A number of insurance companies still will not insure cannabis,” he said. “Which is understandable with the heightened risks,” especially since the drug is still not legal in several American states. In Canada, however, it has become a viable space.

He also noted heightened risks following the collapse of Silicon Valley Bank and other large financial institutions, as well as the litigious M&A environment.

What role do brokers play?

According to Cooper, brokers have a vital role to play in the D&O space and not just in securing coverage for their clients, but in “being aware of what risks the insurers are focussing on” and finding the right fit and right premium accordingly. Brokers can also dig a bit deeper and look at a client’s employment practises, while also carrying out worst-case scenario planning for potential events like wrongful termination or discrimination lawsuits.

Cooper urges brokers and other industry insiders to keep an eye on the potential impact AI and cybersecurity can have on clients’ businesses too.

“These are increasingly important issues and they’re not going away,” Cooper said. “We’re seeing that managers, directors, executives, can all be held responsible for negligence just for overlooking these risks. And if they don’t have best practises in place, their assets can be held liable.”

That’s where it’s vital for the broker to ensure their clients are well prepared, and that they have strong insurance coverage in place, if the worst does happen.

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