D&O underwriting requires long-term approach

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A resurgence in D&O insurance has attracted a range of players back to the area, but one respected insurer warns against relying on fair-weather friends

DIRECTORS AND OFFICERS insurance has had a rough ride over the last few years, but an apparent lull in securities class action filings, together with much higher premiums, is beginning to attract capacity back into the marketplace. For years, Australian D&O was seen as risky and unprofitable for many insurers due to surging shareholder class actions, fears over rising insolvency exposures, and growing cybersecurity threats, all exacerbated by uncertainties stemming from COVID-19. Now, class action frequency appears to have slowed somewhat, and much of the uncertainty brought about by the pandemic has receded.

Berkshire Hathaway Specialty Insurance (BHSI) Australia provides commercial property, mining and energy, construction, casualty, executive and professional lines, marine, transport and logistics liability, accident and health, healthcare liability, surety, and multinational solutions and risk engineering. BHSI’s wide range of insurance products is expanding; this is combined with financial strength, a yes-oriented culture and great flexibility in customising solutions for clients’ needs. BHSI is customer-first, through and through. It views every claim as an opportunity to strengthen its customer relationships and industry reputation because, as BHSI says, ‘Claims is our product’.

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Dip in class action claims

2014

“The concern is that the aggressive growth strategies that we are observing in the D&O marketplace right now foreshadow another period of instability”

Ryan Thomas, Berkshire Hathaway Specialty Insurance

Renewed enthusiasm to underwrite Australian D&O is causing a significant influx of capacity from old and new players alike, offering more options to brokers looking to assist their clients with alternative coverage structures, perhaps involving different insurers altogether. This increased competition may in time push market pricing down in some areas, says Ryan Thomas, manager for financial institutions and directors & officers at Berkshire Hathaway Specialty Insurance. “Between new and re-emerging capacity, there’s probably an additional $50m to $100m of available D&O capacity when compared to the market 12 to 18 months ago,” he says. Now that some of the players who left the market in previous years are returning, premiums are dropping in what at first glance may seem like a positive trend. But Thomas cautions that companies should be wary of chopping and changing their insurance partners based on price alone.

“Customers would be wise to obtain professional advice from their brokers with respect to how best to strike the necessary balance between quality and cost,” he says. “There’s a long list of things to consider beyond just premium spend.” These include an insurer’s claims proposition, creditworthiness, underwriting expertise, product offering, service ethic and, perhaps most relevantly, its commitment to Australian D&O policyholders. If another surge in claims volatility should eventuate, the last thing a company board needs is to find they have purchased a policy backed by an insurer that has withdrawn from the market. Meanwhile, the sense of optimism that accompanied the

transition out of pandemic restrictions is being replaced by emerging economic headwinds, namely cost pressures, both from inflationary forces as well as the RBA’s tightening monetary policy actions, which have significantly increased borrowing costs for businesses in a very short space of time. Companies are understandably attracted to cheaper insurance options as inflation adds pressure to their bottom lines. Thomas suggests that the market in Australia has ebbed back towards a more positive equilibrium, partly as a result of expectations of a wave of business failures being misplaced due to enormous government support for the economy during the pandemic and, of course, the observed drop-off in securities class actions after 2018. “Several actions have [also] gone against plaintiffs, emboldening insurers on the potential for successful defence within the primary limit,” he explains, citing shareholder class actions against Myer, Worley and Iluka.

government moved to regulate the litigation funding industry given the threat it posed to D&O insurance, but many of the proposed legislative changes have yet to take hold or may even be rescinded under the new federal government. “We’re certainly not out of the woods yet in terms of the litigation funding environment,” Thomas says. Stock markets have been volatile recently, and the potential is increasing for mergers and acquisitions due to consolidation – a prime breeding ground for directors' liability claims. “As companies become less certain about their prospects, it becomes harder to manage investor expectations, which could lead to increased volatility in the share market, a phenomenon that has traditionally preceded periods of increased securities class action frequency,” says Thomas. When some of these realities come to bite, the Johnny-come-latelies in the D&O market may bolt. Policyholders should never be forced to self-insure against a D&O claim because their insurer has decided to walk away from their entire portfolio, says Thomas. BHSI’s strategy for D&O is very much for the long term, he says.

Ryan Thomas, Berkshire Hathaway Specialty Insurance

“D&O customers want certainty that their insurer will manage their business in a sustainable fashion so that, should they find themselves in the crosshairs of litigation, their insurer will be there, willing and able to pay claims when the time comes.” One thing some insurers failed to do when premiums increased considerably from a historically low base a few years ago was engage with customers to explain the reasons. “Customers were understandably not impressed with the lack of engagement by many insurers throughout, particularly when it came to offering rationale and context for why their premiums were doubling and tripling year-on-year.” The long game While higher premiums may give the impression that the

industry is profitable in the short term, in this long-tail class of insurance true profitability will not be known for many years. BHSI differentiates itself through its claims proposition, combined with its underwriting approach. “We have a deep respect for the individuals that run Australian organisations, those who conduct themselves with an honest, good-faith approach, putting their personal interests below that of their company and their stakeholders,” Thomas says. In terms of BHSI’s Executive First D&O policy, the long-term commitment is baked into its structure to provide the confidence that a director or officer needs to fulfil their duties and add value to their respective organisations, alleviating the fear of losing their personal assets, their reputation or their livelihood. For example, BHSI can’t stall a claims response when it’s unclear if coverage applies. It also can’t force settlement of a matter simply to avoid trial; or cancel a paid policy or fail to offer to renew it without 60 days’ notice. “Perhaps most important, we will never rescind or void the policy, in whole or in part, for any reason,” says Thomas. BHSI sets the standard in terms of commitment to maintaining a healthy market through building trust and mutual respect. This leads to a more predictable premium spend over time, says Thomas. “Our hope is that the market arrives at this place of sustainability as soon as possible.”

Insurance pricing trend, 2020–2022

Class action claims filed in Australia – year to 30 Sept 2014–2021

2015

2016

2017

2018

2019

2020

2021

Source: Allens report on Australian class actions trends: 2021 update

% change in financial and professional (inc. D&O) insurance pricing, Pacific region

Source: Marsh Specialty and Global Placement

But despite the near-term positives for customers looking to reduce costs, Thomas has genuine concerns that the current market mentality of some underwriters may not be sustainable. “These factors culminate in what some might characterise as a grab for market share by some participants,” he says. “The concern is that the aggressive growth strategies that we are observing in the D&O marketplace right now foreshadow another period of instability.” Class actions still a concern For a long term-player like BHSI, the signs are worrying. A healthy market should mean that year-over-year price changes, in the aggregate, are moderate. Class actions have receded but still pose a real threat. The Morrison

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