How Gallagher prepares clients for D&O rate increases

If your clients are going to be hit with rate increases and major changes in terms and conditions to their directors’ and officers’ (D&O) liability policies, you might want to give them some advance warning.

“We tend to prepare early and get out in front of our clients, 90 to 120 days before renewal, and say ‘Hey, this is what we think is going to happen at renewal. Carriers are cutting capacity, they are raising rates, they are changing terms because they are trying to be in this game for the long term,’” said Dan Lewis, Gallagher’s management liability practice leader for Canada, in a recent interview.

Lewis is scheduled to speak Sept. 15 on a panel, A Hard Market for D&O Insurance and What It Means for You. That webcast panel is part of Gallagher Talks, a day-long series of panels on the changing world of insurance and risk management.

On average, in Canada, D&O rates are up 5% to 20% on renewal, said Lewis.

“We have seen some (D&O) rate increases of more than 100% in Canada but they would be specific to some very very difficult sectors, such as cannabis, fintech, and life sciences. Oil and gas has also had a very difficult year, because of the global oil price war and an already depressed Canadian energy sector,” Lewis told Canadian Underwriter.

“When we are able to prepare the client early and get the message to them about why things are happening, the message is better received and the client can be better prepared. But if that doesn’t happen early and we don’t get renewal information until a week before and the client is shocked by the terms, that’s not the position that we want to be in.”

It’s not just the rates that are going up, said Lewis. Terms and conditions are also changing. Examples of tightening terms could be deductibles, especially on small businesses.

Historically, privately-held companies (as opposed to publicly-traded companies) might have had deductibles of $5,000 or less. Those might be $10,000 or $15,000 now, said Lewis.

“A small organization might say, ‘Hey you just tripled my deductible for no reason.’ But that ties directly back to defence cost inflation and the fact that two days with a lawyer will blow that deductible pretty quickly.”

Some carriers are also adding cyber exclusions to D&O policies.

“So your directors and officers might be named in a lawsuit arising from an alleged data breach and the D&O carrier is saying ‘Go talk to your cyber insurer for that. We don’t want to trigger this policy with that type of risk.’”

Bankruptcy is another example of an exclusion that some D&O writers are adding.

“If a company is in financial distress and cannot get access to capital and they have a ‘going concern’ notation on their financials – meaning there is substantial doubt that they can continue as a going concern – the underwriter sees this as foreseeable loss and is not willing to accept that bankruptcy exposure.”

Among the reasons for recent rate increases is defence costs.

“For publicly-traded companies, we are seeing, on average, inflation rates of about 7% per year for the last decade in defence lawyers’ costs for lawsuits against directors and officers. That compares to a very low inflation rate in the Canadian economy,” said Lewis.

“Over the last decade, D&O liability insurance rates had been flat or falling. It created a real mismatch as lawyers’ fees were rising and that eroded carrier profitability and has exacerbated the need for increased rates and tightening terms.”

Feature image via iStock.com/FangXiaNuo