D&O insurance pricing has flown under the radar for several years, with decreasing premiums and increasing market capacity, however, 2019 has seen steady increases in premiums, with some insurers charging no less than 10% on the expiring premiums. 

Policies have previously been underwritten based on accounting and financial statements. However, today’s D&O market calls for a different approach. The new D&O claim involves data breaches, privacy concerns, social media usage and other events that are often unpredictable by standard underwriting practices. These events have nothing to do with a company’s financial situation, making them almost impossible to quantify.

The cost of the average large loss for D&O policies in the UK has tripled and the number of claims has increased by a third in the last decade, compared to the previous decade.  Some key factors which have had a direct impact on this class of insurance are detailed below;

• Public D&O pricing has deteriorated for the last 15 years

• The impact of annual rate reductions on this portfolio has resulted in a compound 48% rate reduction.

• Broad negative pricing environment coupled with: (i) an expansion in policy wording terms and conditions and (ii) an environment with increased exposure (increased loss cost, increases in litigation and changed regulatory landscape)

• Loss performance has steadily worsened over the last 10 years

• Long-tail class of business means claims not yet fully developed, especially from 2013 onwards

In addition to the above factors, there have been increases in litigation brought from certain areas, such as;

Broadening of corporate criminal liability in the UK and the use of deferred prosecution agreements

The SFO is increasingly using deferred prosecution agreements. Although in the UK these are entered into with the company itself, the focus on co-operation heightens the risk of subsequent individual prosecutions for associated Directors and Officers. The number of claims we have seen based on regulatory prosecutions has tripled since 2012.

Tougher action against directors of insolvent companies

As insolvencies increase in the years following a recession, as do the duties owed by directors to the company and creditors involved. Additionally, since 2015 under the Small Business, Enterprise and Employment Act, liquidators have been able to sell claims arising from wrongful and fraudulent trading to third parties. Litigation funding of liquidators’ claims is becoming bigger business. With tougher action being taken, more opportunities to litigate and an increase in insolvencies overall, adequate protection for board members has become key.

Increased activity by the Pensions Regulator

With more companies entering into insolvency, greater scrutiny is being placed on their activity in the lead-up to liquidation. In particular, the pensions regulator is holding more companies to account for their actions and the powers vested in the regulator could be strengthened even further. Penalties imposed by the Pensions Regulator currently include disqualification and contribution notices, and the latter can be sizeable. Directors can also be called to attend governmental or parliamentary select committees. But the repercussions and penalties may be increasing.

In addition to the more established exposures set out above, we are seeing early-stage changes in the legal environment that are beginning to impact exposures to directors and officers and therefore potential D&O claims arising from:

Environmental Exposure – claims brought by the EA/Local Authority resulting from pollution, allegations of pollution and investigation/defence costs. This can also have an impact against a company’s share price, resulting in the possibility of claims brought by Shareholders.

Product liability - In terms of product liability the key issue will be deciding what senior management knew, and when, in order to determine whether conduct exclusions are relevant and to understand potential defence cost exposures.

Sexual Harassment - Directors and officers may be exposed if, for example, they were shown to be failing to address issues within a working environment; to devise and implement policies to protect employees; or if they didn’t investigate claims thoroughly.

Cyber Risks - Directors and officers may also be held liable for failing in their supervisory duty to protect the data within an organisation or for a lack of proper controls to prevent cyber-attacks and fraud.

More UK Class Actions - Shareholder group actions are growing in number in the UK and are brought against commercial as well as financial entities.

In conclusion, it can be seen that the changing regulatory landscape, coupled with new and emerging areas of risk is leading to a sea change in the world of D&O insurance, however it does also highlight the significance of recommending a comprehensive D&O (MLP) policy as part of any insurance programme, no matter what size a company is.

Call me today for a free quotation and assessment of your business on 02920 626 226.

Daniel Abbott
Sales & Development Director
029 2062 6226