Getting the Most Out of Your Directors and Officers (D&O) Insurance Renewal

With the number of securities class actions claims filed against companies on the rise, have you thought about how this could impact your D&O renewal?

Based on an internal analysis of fiscal year 2016 claims data , we have also observed an uptick in regulatory activity as borne out by the increased volume of notifications made. Interestingly, we have also seen a mushrooming of claims in overseas jurisdictions in which multinational companies operate.

At the same time, companies’ D&O insurance policies have been increasingly under scrutiny at renewals when compared to this time a year ago. While some of this increased underwriting rigour might be attributable to claims activity, it could also be argued that underwriters, faced with shrinking investment income, are more bottom-line focused than in the past. Moreover, several underwriters have conducted actuarial reviews of their portfolios to identify types of business that need to be re-underwritten. For example, the number of US securities claims against European foreign issuers remains proportionately small, as is the number of securities actions filed in Europe. However, we have observed increased scrutiny of US-exposed, European commercial D&O risks.

Given this environment, some companies may find their D&O insurance renewals more challenging than in recent years, particularly those:

• With securities (shares and/or debt) in the US.
• In or near severe financial distress.
• In industries with high D&O claims severity and frequency.
• In the midst of a material, adverse D&O claim.

However, in general, coverage remains broad and supply continues to outstrip demand, meaning it is still possible to obtain favourable cover for D&O risks.

Renewing Your D&O Policy

Keeping recent trends in mind, the following considerations remain critical in ensuring a satisfactory renewal outcome for your D&O policy: 

• Risk differentiation:
      ― How does your company outperform peers in terms of financial, operational, and strategic performance?
      ― How does your company compare to peers in managing legal, compliance, corporate governance, environmental, and sustainability risks? Be prepared to articulate and defend how your company is best in class.
• Rigorous disclosure:
      ― How does your company comply with the Insurance Act of 2015 in terms of a reasonable search?
      ― Who does your company deem to be senior managers?
      ― How do you communicate your data gathering to insurers (For example, via a proposal form and annexures or an annual update)?
• Active engagement with underwriters:
      ― Do you regularly meet with D&O underwriters as part of the renewal process or just see them when a matter surfaces?

Being a passive participant in today’s D&O marketplace could leave you renewing cover for your company and its directors and officers on terms which are commercially unpalatable. Active engagement with your broker and underwriters will yield the best outcome.