So you think you’re covered: the limitations of D&O insurance The range of risks faced by directors is expanding rapidly in the face of the increased challenges of ESG, tougher and more aggressive regulation, increasing levels of litigiousness, and a more fractious and protectionist international business environment. At the same time the insurance market has responded with higher costs and more restrictive T&Cs as they try to deal with the twin challenges of low and volatile investment returns, increased solvency requirements, and the need to improve underwriting margins. Directors sit at the interface of these trends – between a rock and a hard place to say the least! So what can you do to improve this rather gloomy prognosis? Well, here are three suggestions to start with. Understand your risks Nowadays boards and directors are very much aware of the necessity of keeping risk in mind as a regular agenda item. However, governance risks are often (relatively) neglected with such a large range of other financial, operational, and reputational risks to consider. The approach for governance risk should be the same as for other risks, and it starts with a comprehensive review of the risks involved and their potential impact on the fund and board. Only in the light of this can you properly assess whether D&O and other risk management arrangements are fit for purpose. Know how your governance risk management arrangements work and how to access them This goes beyond knowing who the D&O insurance broker is. Of course, brokers fulfil and important role in the acquisition of cover and will be needed to access it in the event of a claim, but D&O is only one aspect of the protection needed by directors. It is no good discovering shortfalls in cover at the point of a claim, and it is certainly advisably to have independent advice in dealing with the consequences of a claim event. It is worth noting that none of the other parties involved in the risk financing arrangements is fully aligned with the directors’ interests collectively, and even less so individually. Make sure you have specific expertise available to support and advise Modern boards do have a wide range of skills and backgrounds but where there is no specific expertise available amongst the directors, it is important to seek expert, independent support and advice. If the board does not have expertise available amongst its members, it should seek it elsewhere. As with any other advice acquisition, it needs to be both independent and have relevant expertise, particularly in the areas of the analysis of governance risk, broker selection and the purchase of D&O, event and claims handling, and general risk advice. Thorndon is fully focused on the provision of risk management services to the fund director community. Our mission is to make governance safer and facilitate better decision making in the fund industry. Find out more about us at www.thorndon.gg or contact me at firstname.lastname@example.org or Jonathan Bates at email@example.com.
So Axa Exel have withdrawn from the professional risks markets: another major player pulling out of an already distressed market. As we have been saying for some time this market will get worse before it gets better and there are a number of reasons for this. Firstly, overall insurance capacity has been reduced by a number of years of claims, constrained investment returns, and Secondly other classes of insurance offer better returns, less volatility, and greater premium volumes – in other words they have a better risk / return ration and plenty of appetite to hoover up available capital. Thirdly, professional risk claims records have been deteriorating in recent years against a longer term background of persistent soft market conditions of low premiums and generous terms of cover. So what are the implications? In the first instance there will be an acceleration in rate increases and further diminution of available capacity for PI and D&O across the entire range of financial services, particularly for perceived risky retail business such as UK IFAs, insurance brokers, and investment managers. This will certainly continue into 2021 and beyond and will be exacerbated further if the expected additional claims arising out of Covid, Brexit and the world economic downturn materialise at levels above current predictions. Secondly, this is not in our view the hard end of a cycle from which the market will return to the prolonged soft market conditions of the last 20 years or more. Just as the huge influx of new, clean capital has had an extended effect on the last 20 years, so this contraction and re-evaluation of markets and risk is likely to have a sustained impact over the next few years. Radical new thinking will be needed. These changes are already being observed in the form of new vehicles being established in the wholesale space, renewed interest in corporate risk captives, and the accelerated development of more flexible market models such as MGAs and ILSs. And what about your D&O? What can you do to get the best out of such a difficult market? As ever there are no silver bullet solutions. It is good old insurance 101. Understand your risk environment: your chances of gaining a more sympathetic view from underwriters is much enhanced by providing clarity regarding what they are insuring. Get the right advisers: off the peg cover is fine for generic risks but unusual risks require a more bespoke approach. As ever with complex purchases, independent, objective, expert advice is essential. Plan early: inevitably in such a distressed markets, renewal proposals will tend to be delayed as brokers try to chase down enough capacity and negotiate the last ounce of value on your behalf. Contacting them and getting your renewal process underway significantly earlier than previous years will give you more time to adapt and respond to early signs that the process is not running smoothly. At Thorndon we specialise in providing independent support to directors and boards addressing these issues. For more information contact Jon Bates (JB@thorndon.gg) or Dom Wheatley (firstname.lastname@example.org).