Canadian Underwriter

The real reasons behind Canada’s softer D&O market

December 9, 2022   by Philip Porado

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“Expanded insurer appetite and competition in the primary space,” as well as new capacity in excess layers, helps explain a softening of Directors and Officers (D&O) insurance pricing and limits expansions in Canada, says a recent quarterly market insights report from AON.

But the capacity story is nuanced, said Imran Pira, senior vice president and head of management and professional lines at NFP Canada.

He noted the capacity uptick is primarily attributable to MGAs, including two London-backed players focusing on specialty lines of business. That presence has combined with the influence of new international players, like Tokio Marine, which historically have not had dedicated Canadian operations.

“Quite a few Bermuda markets are entering or expanding their appetite in the Canadian space as well,” he said. “They play in traditional industry classes and sectors but also have increased appetite to tackle emerging risks.”

Although new capacity is a contributing factor to increased D&O market competition, Pira said it’s not the main factor in the current market cycle transition. New capacity is filling holes left by insurers that made strategic decisions to move away from D&O coverage lines in Canada.

“That market transition, or moving more towards a softer market, is being driven by existing insurance or incumbent insurers that have scaled up as a result of the hard market,” he said. “They have larger books now and have been able to capitalize on some significant premium opportunities.

“Policy count is up, and portfolio sizes are larger, so that’s giving them the capability to put up larger limits, play lower down in D&O programs and participate in ways they may not have had the comfort to do [previously]. That is probably impacting the market transition more than new capacity.”

Those larger books mean insurers have more backing to contend with potential losses in the future, Pira noted.

“The more robust and the larger your businesses, the more risk you can probably take on and put onto your books,” he said. “That’s the effect it’s having on the rest of the market. They’re doing things they weren’t able to do before.”

Diversity of both product and industry classes also helps. Beyond D&O, underwriters are now offering a complementary suite of ancillary line products for crime, employment practices liability and fiduciary products.

“So, diversifying policy type as well as product type, as opposed to just your traditional D&O coverage,” Pira said. “Some of those product lines tend to be less frequent from a claims perspective.

“It results in having a more well-rounded portfolio that allows them to write more business. That allows them to participate and provide more capacity because they’re essentially bolstering the strength behind the capital that they’re providing through the diversity of the business they’ve built.”

And, while the market has shown signs of softening, insurers are still watching hot-button areas like due diligence around cyber protocols, disclosures around environmental, social and governance issues, and due diligence around how companies set up and administer their benefits plans.

“If you’re tackling and displaying that you have a high level of oversight, and you’re improving those risk-profile metrics, that’s where you’re seeing insurers participate,” said Pira. “They will have a higher level of comfort around your business, regardless of sector.”

Likewise, the hard market experience means insurers now have a better handle on management of limits and ensuring the right deductible retention exists for any given risk.

“Before [the hard market], you could obtain larger limits from a single insurer, coupled with lower deductibles – that was achievable on a regular basis,” said Pira. “The market has adjusted to a more sustainable balance between limit deployment, and deductible levels are…more protective of their portfolios.

“That’s become a lot more consistent, a bit more of a conservative approach from the insurer side of things. Seeing a $25-million primary limit on a public company was not abnormal five or seven years ago. That no longer exists.”


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