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COVID-19 Thrusts D&O into Hardest Market as Underwriting Tightens

The directors & officers market saw a hardening at the beginning of the year, and the coronavirus pandemic has caused even more disruption.
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At the start of the year, the directors & officers market was hardening. “Almost all D&O buyers were seeing their premiums increase, with public company D&O insurers seeing substantial increases,” says Kevin LaCroix, an executive vice president at RT ProExec, a division of R-T Specialty, LLC.

These changes were the result of adverse claims trends, significant increases to prior accident year underwriting reserves, compounded by years of underpricing, he explains. IPO companies, life sciences companies and financially impaired companies were seeing 50% increases with renewal terms that often included significant increases in the self-insured retention.

The coronavirus pandemic has caused even more disruption. Alongside rate increases, certain industries are being hit even harder—both from an insurance and company perspective—as underwriting tightens significantly.

“With the COVID-19 crisis and the economic recourse it brings, this solidifies the hardening market, especially in the small business sector and in retail and hospitality operations,” says Heather Schaaf, underwriting director, Burns & Wilcox.

“These segments should know that it is likely their policy renewal will not be flat and that aside from the retention and premium increases, they may not be able to obtain the same limits and coverage as before, given some carriers are pulling back limits and adding exclusions or, in extreme cases, sending nonrenewals,” Schaaf says. “They may also see more declinations on new small business D&O risks.”

As a result of the coronavirus pandemic, certain businesses and sectors have become hard-to-place classes as insurers institute “a host of new underwriting procedures geared toward trying to understand the operational and financial impact on the applicant company of the pandemic,” LaCroix says.

In addition to the retail and hospitality sectors, cannabis-related businesses and cryptocurrency organizations remain hard to place, as well as many other sectors. Airlines, hotel chains, casinos and cruise ship companies, “will face a very different underwriting process than they may have faced in the past” as insurers begin to class them as “suspect classes,” LaCroix says.

Joseph Spallone, senior vice president, commercial management liability, Sompo International U.S. Insurance, is also witnessing “rigorous underwriting diligence as the COVID-19 environment heightens,” and warns of other exposures due to businesses’ financial strength, reliance on supply chains and the preparedness of smaller companies amid an economic turndown.

Within the at-risk areas, “there is the risk of a significant number of bankruptcies,” Spallone says. “Over the next six to nine months, that could likely lead to claims from creditors or trustees, which have historically been severity drivers for insurers’ private books of business.”

Additionally, Spallone looks back to the Great Recession to highlight another sore spot for insureds. “This pandemic’s impact on the economy in the near term and the uncertainty of what lies ahead in the form of further hardships, coupled with the recovery time, is not too dissimilar to the financial crisis,” Spallone says.

Compared to 2008, the difference is not bad behavior or aggressive business practices, but rather the stress on businesses created by shutting down the vast majority of the global economy, Spallone explains. As a result, “management has been forced to make difficult decisions with respect to staff, financial obligations and disclosures to constituents,” he says.

“The pandemic will be the root of new D&O event-driven claims,” Schaaf explains, who notes that the courts will be forced to decide if a “business’ response should have been better, done differently or the company should have been more prepared to weather a particular storm, such as protecting the company against financial loss,” she says. “These will be test cases on our court system as they involve some speculation.”

The economic environment has caused carriers to begin adding “virus, bankruptcy and downsizing exclusions,” says Peter R. Taffae, managing director, Executive Perils, who expects the current trends to continue for a while yet.

“Historically, hard markets have lasted approximately 18 months,” Taffae says. “Even in 2008, except for real estate and financial instructions, the 18 months patterned continued.” However, Taffae believes the conditions will last two to three years.

“Insurance companies are grossly unreserved from more than 10 years of soft pricing and there is a very good chance that some insurance companies will not survive,” Taffae says. “Those with fragile reinsurance relationships and small written premiums will face large challenges to survive.”

“Having financially secure insurance companies on insureds’ programs needs to be considered at this year’s renewal,” he adds. "Typically, these are long tail claims, ranging from three to five years before resolved.”

Will Jones is IA managing editor. This article was published in the June issue of Independent Agent magazine.