Mired in a hard market, brokers need to give twice the typical amount of lead time these days when contacting underwriters to secure directors and officers (D&O) coverage for clients, according to a broker expert.
The D&O market will remain hard because it has a long road to recovery, observed Raj Aujla, Calgary-based managing partner, professional and executive risk leader at EQUA Specialty Risk Partners Corporation. Underwriters are also being inundated with requests as they sort through coverage requests due to changing circumstances brought on by the COVID-19 pandemic. So brokers need to work with a lot of lead time to serve their clients.
Just how much longer is the process taking? “I’d say more than double the time as before,” Aujla told Canadian Underwriter. “You got to keep in mind, I would say capacity shrunk by about 50%.”
The hard market also puts brokers in the position of flexing their muscles to ensure their clients are appropriately protected. Having the right broker to navigate through these waters is essential for all commercial clients, he stressed.
“From the client’s perspective, I think the key is to make sure [clients] have the right broker who knows what they’re doing and has the relationships with the underwriting community,” Aujla added.
But the right broker can help clients figure out if they not only have coverage, but the right kind of coverage for their business. Much of the business has been commoditized over the last 10 years or so, he assessed.
“So, everyone tends to just focus on price. But the nuances in coverage difference are significant as well,” Aujla pointed out. “So I think what’s happening now because the price has gotten out of hand, buyers are starting to look at, ‘Well, what am I buying exactly? Do I really need to buy everything I’m buying? Do I need Side-C coverage? Could I consider only a Side-A coverage program? I’ve been in business for 75 years. I’m not about to go under. So we can retain more risk and let’s just buy a D&O policy for those catastrophic events — company killer events.’”
And rates have started to skyrocket, he said. “I’ve seen rates as high as 10%, 15%, up to as high as 20% rate, if you could imagine. I mean, that’s unheard of,” Aujla said. “I’ve seen limits of $2.5 million quoted in excess of $250,000.”
Buyers may want to consider increasing their retentions so they are sharing more of the risk. “That gives you some negotiating position with underwriters [but] not a whole lot because D&O claims tend to be either all or nothing,” Aujla said. “It’s a big loss or it’s no loss. So [underwriters] are less inclined to give you a significant discount for a $2.5 million retention versus $1 million.”
Aujla advised brokers to get in front of underwriters and share their clients’ passion for their business. Use that as a selling point for favourable coverage.
“Explain to them how your business operates, how you operate within that finite segment in your niche,” he said in an interview. “And once you tell them that story then they gain comfort. After all, it is a people business. That helps tremendously.”
Many companies are reinforcing their risk management protocols and strategies — if clients are doing this, underwriters need to know, Aujla added.