We are in one of the most difficult D&O insurance markets in decades. In this week’s blog post, my colleague Seth Naterman provides timely advice on how to handle it. –Priya Huskins
Any career D&O insurance practitioner will tell you that the current D&O insurance environment is like nothing they have seen before. Prior to the Cyan decision from the US Supreme Court in March 2018, we had experienced a decade of decreasing prices and expanding coverage while the number and severity of claims rose. In mid-2018, the impact of Cyan escalated the firming of the D&O market for companies undergoing an IPO. That firming became “hard” in 2019, with a rapid escalation in the cost and terms of IPO insurance that progressed through the year and continues today. 2019 also saw the hard market expand to all companies, IPO or not. Many thought the rate of increases might slow (but not stop) in 2020, but then COVID-19 entered, halting global economies and adding new risk to the insurance market. With this as a backdrop, I want to share some thoughts on how to make the best of a bad situation.
Start Early, Get Educated, and Engage Your Network
Though the next year is sure to remain a challenging insurance market, good preparation and starting the renewal process early can relieve some of the sting. Begin by educating yourself on how and why the market is changing. This includes understanding insurance in general, familiarizing yourself with the macro claims environment and how that impacts insurers, and recognizing how economic factors can influence risk appetite. The more knowledgeable you are on the fundamentals of insurance, the better you will be able to differentiate yourself to insurers and obtain more favorable results.
It is also important to talk with others in your network. Doing so will help you appreciate how widespread the hard market is and provide an opportunity to exchange thoughts on how best to manage its impact. Most will tell you how challenging their renewal was, but there will be some whose experiences weren’t as bad. In your discussions, remember that numerous factors can impact what renewal terms look like. Risk specifics such as the performance of the business, debt or equity raises, M&A activity, and claims experience are all D&O underwriting factors that impact terms irrespective of market conditions.
In addition, what happened the prior year will impact the latest renewal. For some, last year may have been particularly challenging in terms of increased pricing, but, as a result, the pricing may not have had to be adjusted as much in the most recent renewal. Others may have had a softer, less onerous price increase in the prior renewal, resulting in painful corrections this year. And, depending on the business, there are those who have had multiple difficult renewal cycles.
Be sure to engage with your internal network too and socialize them on the state of the insurance environment. While a CEO or CFO won’t like hearing that costs could escalate (perhaps for the second or third year in a row), it is far better for them to have time to plan for the impact rather than be surprised at the time of renewal. At this point, also consider how other business units at your firm may be able to support the insurance process—whether through obtaining needed information or leveraging their relationships—and begin engaging with them.
Prepare and Strategize
Developing a timeline keeps the insured, broker, and insurance market in sync and is an important part of facilitating a successful renewal. Perhaps the most critical activity in the D&O insurance cycle is a meeting between company leadership and insurers. The purpose of this meeting is to help insurers become more familiar and comfortable with your risk and to address any specific concerns they may have. By planning early, you will be able to secure calendars for this high-priority session. Additionally, the timeline should incorporate the decision tree for approving the insurance purchase. For many companies, this includes not only a briefing with senior members of management, but also presentations to the Board of Directors or Audit Committee. Dates for such meetings are typically set well in advance and can serve as critical milestones for your renewal timeline.
A good strategic plan will always yield better results than undertaking a haphazard process. The previously mentioned engagement of other business units should be incorporated into the plan. In addition to helping everyone stay on track, this may help you identify business relationships with insurers as vendors or clients that can be leveraged for the renewal. Others in your firm may also be better positioned to discuss particularly sensitive parts of your risk profile, whether it be a legal, product, or financial issue.
A good renewal strategy requires knowing what you want to accomplish. The goal should be more than merely renewing coverage on time and not spending too much money in the process. While containing cost is surely important today, from a broader perspective it is critical to understand your risk and exposure first and then make cost-sensitive decisions. This entails reviewing tools and models to identify what a claim against your company may look like and assessing your tolerance for retaining risk should a claim occur.
Once you have calibrated your risk, you will be better positioned to consider how much insurance to buy and how the insurance program can be structured. For example, changes in your risk profile may support the purchase of less insurance, or the data may suggest that you should consider buying more. Thus, the step of first analyzing your current risk profile will help determine the best manner for you to manage the financial impact of the hard market.
With strategic plans set, you can begin engaging with the marketplace. In years past, this would entail arranging conference calls or meetings with insurers and having your broker tell the insurers when their quotes are expected. But today’s marketplace is different. To get the best results, it’s helpful to respect the challenges the insurers themselves are facing.
At most insurance companies, the time required to underwrite a risk has expanded as line-underwriters have less authority, and management seeks to ensure that they are assuming risk at the terms needed to sustain their business. Some insurers may reduce the limits they will provide or change the level of the program at which they will participate, while others may have greater focus on ensuring rates are at the right level for them to support a risk. In some instances, re-insurers may dictate minimum rates that must be achieved, leaving the insurer with little flexibility. Any of these dynamics can alter the trajectory of a renewal and impact your plans. This grim reality of today’s environment requires patience, fortitude, and persistence for the insurance brokerage process to work.
To be successful today, it’s helpful to place the stress of the hard market aside and invest in working with insurers to reach “fair” terms for everyone. A large part of this is picking your battles. Critical items surely must be addressed, but making every item on your list a priority will alienate insurers and result in less flexibility with getting to the right spot on more substantive matters, or—all too often—carriers simply saying “no” to everything and moving on to the next of many accounts on their desk.
Relationships matter in a market such as this where insurers know they have the upper hand. Insurers will be more flexible with clients that have been fair partners in the past and who are respectful of the factors driving the marketplace today. Insurers know who their loyal clients are, and if they feel they were treated fairly by them in the soft market, they are much more likely to reciprocate today. Importantly, after the insurance renews and the dust settles, all parties should feel they were respected through negotiations—something that will yield benefits the next time around.
While we must navigate a difficult marketplace right now, one that is incredibly painful for policyholders, it’s important to remember that insurance works in cycles. Rates will reach a point where current markets consider them more sustainable and compete more strongly for risks. New capacity will enter the marketplace and further increase competition. No one can say when this will happen, but in the end, the market will turn, and we will get through this.