Directors & Officers Insurance
Unanticipated risks, growing legal defense costs and undisclosed cybersecurity exposures are challenging the directors and officers insurance business.
- Meg Green
- April 2019
Over the past few years, there has been a significant development in terms of unanticipated risks that the underwriters and insurance companies are really grappling with.
Various forces are increasing the complexity of risks facing directors and officers, requiring insurers to become more knowledgeable about the unique risks of the industries they cover, said Sridhar Manyem, director of research, AM Best. Manyem spoke with AMBestTV at the PLUS D&O Symposium in New York.
Following is an edited transcript of the interview.
D&O claims are becoming more complex. What are you seeing there?
We are seeing a greater trend in terms of the complexity of the D&O claims lately. D&O has always been a pretty complex line to underwrite, but then, at least people understood the risks that they were underwriting. Over the past few years, there has been a significant development in terms of unanticipated risks that the underwriters and insurance companies are really grappling with.
For example, the #MeToo movement, has created a lot of consternation in terms of proper behavior and the proper compensation for the kind of harassment that has taken place. Therefore, directors and officers are really worried, what kind of liabilities that they have. These losses have crept up steadily over the past few years. Recently, there's been a significant loss creep from cyber insurance policies, as well, in terms of the duty of the directors and officers to make sure that the disclosures regarding the cybersecurity of a company is appropriate. If they have disclosed something and there has been a significant event that has not been anticipated, then they might be on the hook for it, as well.
The third thing that is happening is the increasing securities class-action litigation and the derivative claims that are associated with that, as well. As a couple of Supreme Court decisions in terms of Cyan vs. Beaver County, that has allowed the proliferation of these lawsuits at the state level. These have all added to the complexities in terms of underwriting the D&O risk.
As these claims become more complex, how is it impacting insurers' bottom lines?
Insurers are really struggling to contain what is becoming a more and more significant component of their bottom line, which is the defense cost containment. Every single lawsuit, trivial, frivolous or serious needs to be defended. Therefore, the cost of these defenses have become an increasingly significant portion of the insurance companies' bottom line.
The trend has also been aggravated by a lot of emerging law firms with significant war chests that have taken the litigation very seriously and are finding more and more lawsuits. Therefore on that front, the insurers are definitely facing a significant challenge. They are facing pressure due to loss ratios, as well, because when they were underwriting to these risks they did not anticipate these risks emerging. Therefore, on the losses, as well, they are seeing a significant uptick. On the other hand, the prices have just started improving a little bit. They haven't really caught up with the loss spends yet. There is pressure, both on the top line and the bottom line.
How is the industry responding?
They are still struggling. The better insurance companies, the ones that are really focusing on the D&O risks, are the ones that are investing a lot in significant domain experience. D&O is not a catch-all underwriting. If you're underwriting an investment fund or an asset manager, that requires a different domain knowledge than if you are underwriting a technology company where cyberrisks can proliferate a lot more.
There is also a different mindset that you need to bring when you're underwriting a private company. For example, in a public company the financials are audited, transparent and dependable whereas in a private company setting maybe you need to make some judgment calls. There are different risks associated with each kind of D&O. Treating it as a general line is fraught with risks. Therefore, developing domain knowledge and deep expertise of the industries that you're underwriting is key to success. That's what successful companies are doing. Some companies that are new entrants might be caught unawares and might face problems in the future because of emerging risk, be it what we mentioned or something that might develop in the future, as well.