Several turbulent years of increased claims, more regulation and additional oversight of directors and officers have not deterred carriers from the directors and officers (D&O) liability segment. As more carriers beef up their policies to address new needs in this ever-changing marketplace, other newer entrants see plenty of opportunity for growth.
Beazley & Hiscox, Travelers and Berkshire Hathaway Specialty Insurance (BHSI) are the most recent newsmakers. Underwriters for the companies agree that the private, non-profit and public D&O segments have evolved significantly in the last 10 years. This has resulted in a need for changes to D&O policies — led by requests from insureds themselves — and insurers have to respond if they want to stay on top in this oversaturated market.
“The market and coverage is changing very rapidly,” says John Trefry, D&O product manager for Travelers’ Bond and Financial Products. “We try to be prudent in responding to those requests and understanding the ramifications of making even minor changes to policy languages. Keeping up with coverage requests, understanding what the significance of the changes are and if they make sense can be a challenge.”
Rachel Turk, D&O underwriter, Specialty Lines for Beazley, says the changing landscape of claims and increasing international risks are a challenge for insurers and a catalyst for changes to D&O policies.
“There are an increasing number of multinational companies that don’t just work in the U.S. and need policies in multiple jurisdictions. The severity and frequency of claims is not as high in the U.S. but [when companies have operations] in other jurisdictions there are tax investigations and that sort of thing that can cause upsets,” she says.
What has not changed in this market is the importance and necessity of D&O coverage — whether it is for public, private or non-profit directors and officers. It has been a tumultuous time for financial institutions, especially, and having adequate D&O coverage has been more important than ever since the financial crisis of 2008.
Berkshire Hathaway Specialty Insurance
Many carriers cut back on coverage or limits for directors and officers of financial institutions, or exited this class altogether in the last several years. But one particularly newsworthy new entrant — Berkshire Hathaway Specialty Insurance — has committed to the class for the long term.
“From an underwriting perspective, financial institutions are highly correlated to the economy. When there is an asset or credit bubble that bursts, financial institutions are largely impacted by these events and their balance sheets, performance and claims activity are concentrated on these events,” says Dan Fortin, senior vice president of Executive and Professional Lines. “Many insurers shy away because of the volatility but insurers like Berkshire Hathaway take a longer term approach. You have to if you are going to participate in this space because of the volatility.”
BHSI launched its directors and officers coverage for financial institutions and larger commercial entities at the end of January. The new Executive First policy includes expanded protection for individual members of a board and management team in the event the company is insolvent or otherwise able to indemnify them in connection with a claim.
The form also addresses exposures like securities class actions, shareholder derivative actions and government investigations. Capacity is available up to $100 million on a non-admitted basis, with admitted coverage coming later this year.
Fortin says part of the long term approach involves being selective in pricing and with whom they insure, as well as partnering with those brokers who have the same perspective.
“In a seven to 10 year period, there will be a time when underwriting results will not be pretty. But that can be offset by some very good years,” says Fortin.
Todd Greeley, vice president of Executive Professional Lines, Claims, says the frequency of claims for financial institutions has dropped off significantly since the height of the crisis between 2007-2009, which he says fits in with the historical pattern the underwriters at BHSI have seen in their more than 20 years in the space.
“The bottom line for us is we really like this space — it is very cyclical and we have the ability to ride out the storms,” he says. “That risk selection is critical. If you can do that well that helps you ride out the bad years and the years we don’t have the systemic events can be very good years.”
Greeley says working with the large risks also allows BHSI more flexibility.
“It’s a space where the ability to be creative in how you approach the risks is greater. You have very sophisticated customers who really appreciate the ability to be creative,” he says.
For Travelers, the time was right to update its D&O coverage for public, private and non-profit organizations. Trefry says since the carrier first released its original Broad Form policy in 2009, the D&O marketplace has evolved and changed rapidly with requests from insureds that the carrier previously responded to with endorsements.
“We wanted to have a cutting edge product and we could have accomplished that through endorsements to the older form, but we felt now was the time to come out with a new form,” says Trefry.
The new Broad Form+ includes: nonrescindable coverage for nonindemnifiable claims against directors and officers, including pre-claim inquiries by regulatory or governmental authorities; no exclusions for independent directors and an additional limit of liability for nonindemnified loss of independent directors without a requirement that claims, pre-claim inquiries or custodial detentions be unrelated; and difference in condition (DIC) coverage or protection when indemnification is not available or paid by any other source; among other features.
The carrier also conducted research in the fourth quarter of 2013 on nonprofit buying habits and found that 69 percent of nonprofits don’t have D&O coverage and with more than 2 million nonprofits in the U.S., that means there is a real opportunity.
The top four reasons the carrier found for nonprofits not to purchase coverage were: lack of perceived risk, lack of budget, lack of necessity, or they felt the coverage was not affordable. The Travelers survey also found that 40 percent of nonprofits that don’t purchase insurance don’t know their personal assets are at risk.
“The lack of perceived risk is most concerning,” says Trefry. “Clearly there is a knowledge gap and that is valuable information. We are trying to encourage our trading partners to educate their nonprofit clients.”
The Lloyd’s-backed insurer released a new suite of directors and officers forms at the end of December and just last month partnered with Hiscox to offer brokers and clients a D&O consortium providing higher limits to U.S.-domiciled companies. Beazley currently works with most D&O risks except financial institutions.
Turk says the goal of the consortium is to give the two London-based markets a “seat at the table” when it comes to providing directors and officers coverage to U.S.-based companies. Up until now, Beazley has competed with U.S. insurers and it has struggled with getting business to think of the London markets, says Turk.
“Brokers can no long discount London as there are now two markets that offer $50 million in capacity and we can come up with more creative solutions because we are sharing the risk,” she says. “With the consortium we are more relevant and we are hoping to see more risks.”
Hiscox is in the process of getting its U.S. D&O business up and running, with the program being led by former Beazley executive, Chris Warrior. Turk says Beazley’s previous relationship with Warrior was another reason for the partnership with Hiscox. The consortium agreement is just for new business with Beazley leading the business until Hiscox’s program has been established. After, it will be up to brokers and clients which insurer they want the lead coverage to be with. Clients are also not forced to use the consortium if they would prefer to just work with one of the insurers.
“The program is very flexible and we are trying to offer choice to brokers and let them decide how it will operate for their clients,” says Turk.