What brokers should know about the hardening D&O market

As premiums continue rising and capacity keeps tightening, brokers placing directors and officers (D&O) liability insurance are grappling with an unpredictable market.

“The last time we saw a hardening D&O market was during the financial crisis in the late 2000s. But it was not nearly as spiky and unpredictable,” said Brooke Hunter, president & CEO of Toronto-based Hunters International Insurance Brokers, a member of the Canadian Broker Network.

“I do see some glimmers of D&O stability,” Hunter added. “The premium increases are becoming somewhat more predictable, except for what I would characterize as distressed business. Cyber, of course, is an entirely different animal in its own chaotic market.”

Brokers discussed the hardening D&O insurance market during a webinar last month hosted by the U.S.-based Wholesale & Specialty Insurance Association.

Increased claims frequency and severity, mergers & acquisitions, tougher underwriting, social inflation, increasingly complex business ventures and growing cybersecurity concerns were cited by brokers for the recent hardening of the market.

While Hunter agreed these factors exist in Canada, brokers here would not see the same frequency of claims, she said. “Not only are Canadians generally less litigious, our statutes are such that public shareholders don’t have the same mechanisms to seek relief as in the States.”

Having said that, the local situation is exacerbated by a number of global factors, Hunter added.

“Global insurance capacity for any line is more expensive right now, for market hardening reasons of which we are all well aware — from climate change to COVID-19 uncertainty. Overlay that with economic uncertainty, and D&O pricing will continue to climb,” she said. “And let’s not forget we have years and years of underpricing, particularly for D&O for private companies and non-profits.”

The current environment sees companies engineering more sophisticated, less traditional corporate structures in order to access the most tax-effective capital possible. This means brokers “can no longer flip over an application to a client to generate an appropriate risk profile,” Hunter said. Rather, brokers need to “really understand the structure relative to the wording to make the program fit.”

“All of this is magnified in the M&A context,” Hunter added. “Each deal needs to be examined against the backdrop of the D&O placements.”

In addition, brokers will find the transactional insurance market hardening. “Yesterday’s assumptions might not work today,” Hunter concluded.

Feature image by iStock.com/Delmaine Donson