Directors & Officers Market Update

The Directors & Officers (D&O) market has been one of the most challenging and stressed segments in the insurance marketplace for some time. High volumes of claims activity, particularly concerning securities class-actions, have dramatically impacted insurer profitability, leading to inflated premium costs and reduced market capacity.

Fortunately, some encouraging signs suggest that the volatile conditions that have disrupted the D&O market in recent years are starting to stabilise. The market is by no means reversing course entirely, but several key performance indicators suggest that the general outlook for insurance buyers is far more optimistic as we head into the second half of 2022.

According to multiple industry sources, the D&O market is finally returning to profitability following a sustained period of inflated premium costs that peaked in late 2021. Major legislative reforms to Australia's class action regime, which the Federal Government announced during the pandemic, has also boosted insurer appetite in the marketplace.

These developments, together with a dip in securities litigation frequency, are attracting fresh capacity from new insurers entering the market, driving a more competitive environment and providing some relief on pricing.

For example, a recent report published by Aon showed that the average rate increases experienced by their ASX 200 clients (primary rate per million dollars of capacity/sums insured) had dropped to less than 7% between 2020 and 2021; down from +18% in the previous year. They further reported that average premium increases for private companies had also dropped (in the main) for well-performing risks with no ongoing claims.

“We expect increases for this segment to ease further as the year goes on, particularly for companies whose risk profile is appropriately aligned with an insurers risk selection criteria”, Aon stated.

Increasing competition in the marketplace has also positively impacted self-insured retention levels (deductibles). As a result, insurers are becoming less inclined to impose higher deductibles – a common requirement in recent years – with many insurers generally willing to maintain the existing levels.

However, while the D&O market is showing signs of improvement and pressure on pricing is starting to ease, Aon caution that some insurers profit margins are still limited.

“For the first time in many years, the Combined Operating Ratio (“COR”) fell slightly below 100%”, Aon stated. “As D&O insurers' target for COR is between 80% and 88%, the market still has some way to reach a margin that allows them to deliver an acceptable dividend to shareholders”.

While the market outlook moving forward is generally trending in a more positive direction, securing D&O insurance will continue to be a challenge for some industries and businesses, particularly those impacted by COVID-19 and/or those with historical claims issues.

Many brokers believe that insurers will remain conservative when deploying their capacity and are likely to persist with targeted policy exclusions or limitations that enable them to control their own exposures more efficiently.

Environmental, Social and Governance (“ESG”) risk is an emerging exposure for many companies and one that has become a major area of focus for insurers in the D&O space. Cyber security has also become a key focus, with many insurers placing higher demands on company directors to ensure appropriate reporting and cyber security systems are in place.

An increasing onus on company directors to effectively demonstrate their ability to manage these issues will continue to influence insurers’ appetite and impact the cost and availability of D&O insurance.

Ultimately, D&O insurers continue to impose higher premiums, but the rate of increases are declining. Companies that experienced severe adjustments in recent renewals are generally seeing smaller increases, while 'high-risk' accounts are still experiencing spikes in pricing.

Securing the right cover at a reasonable price will still be challenging for many organisations in what remains a complex D&O market. Organisations with ongoing/open claims, poor corporate governance, or weak balance sheets may struggle to see any benefit from the improving market conditions.

For this reason, your insurance broker's performance is crucial. As your spokesperson and exclusive representative in the marketplace, their ability to successfully sell your risks to insurers is critical to ensure you secure the best deal available in the current climate.

Navigating the world of business insurance can be fraught. So contact Australia’s leading specialist consultancy group that supports businesses through the complex exercise of implementing efficient insurance programs.