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D&O insurers engaging in 'opportunistic pricing': Marsh

Insurers have compounded the hardening directors’ and officers’ (D&O) rate environment by engaging in “opportunistic pricing” and offering little flexibility, leaving companies in a bind as premiums show no signs of easing in the foreseeable future, says Marsh.

The broker says many companies have been forced to review their entire risk management strategies, with some looking at alternative and previously untested risk transfer solutions as a way around the situation.

In instances where insurers have used “opportunistic pricing” as a negotiating tactic, they do so by holding off quotations or renewal terms until a few days before policies expire, potentially leaving insureds vulnerable with limited choice at the eleventh hour.

In such cases insurers often charge premiums “many times greater” for a policy’s excess layer portion, despite it carrying less exposure than the underlying layer of coverage. In a multi-layer policy, the underlying layer responds first to a covered loss and when its limit is exhausted, then only will the excess layers kick in.

Marsh says the majority of insurers have displayed a general level of inflexibility and unwillingness to find solutions for their clients.

“These insurers, seemingly, are not concerned about losing such business,” Marsh says in its Directors' and Officers' Liability Insurance Market Recap 2020 report.

“There are, however, exceptions to the majority, where select markets are still willing to work with loyal clients to reach mutually agreeable solutions and outcomes, which has resulted in some insureds maintaining a reasonable level of cover.

“However, many insureds are left with little or no choice. Where insureds have chosen to stop buying covers due to cost, this premium is potentially lost forever to the insurance market.”

Companies are looking at non-traditional ways to protect directors and officers, such as using protected cell captives where the provider of the insurance cover is wholly owned or controlled by the insureds.

A number of ASX-listed companies have volunteered to have very large increases in retentions or deductibles of $5-10 million or higher, depending on their market capitalisation, as one way of managing rising premium cost.

Buying significantly lower limits than previously and accepting new exclusions just to secure a cover are the other trends that have been taking place in what has been a “watershed year” for D&O in Australia, Marsh says. Some of the exclusions are a consequence of COVID-19 and involve insurers introducing an insolvency clause in new D&O policies for companies facing financial difficulties.

Marsh’s ASX200 client data shows average D&O rates have increased more than 200% so far this year and there are no indications conditions will ease or stabilise soon.

“Given the volatility of the market, it is difficult to say with any level of certainty what pricing and available capacity will look like in 2021,” Marsh said.

Based upon Marsh’s analysis, there is no particular industry more impacted than others.

“Companies across Australia, regardless of industry and size, are all sustaining the impacts of these challenging market conditions.”

On the positive side, the premium pool being collected now is at a level which appears to be sustainable, Head of Financial and Professional Liability Craig Claughton said.

“The conditions are at a point where new entrants may consider coming into the market,” he told today. “However, premiums are still expected to grow in 2021.”

A number of key insurers quit the Australian and global D&O markets this year, according to the Marsh report. Competition remains low and Marsh says it is unaware of any new players that entered the local market this year.

Click here to download the report.