The D&O insurance marketplace has become increasing cautious in the provision of coverage to public company insureds. Insurers' aggressive pricing strategies over a number of years, coupled with a significant increase in securities class action claims activity, has placed the Australian D&O premium pool under enormous pressure.
Insurers are now actively seeking to re-align pricing for sustainability and margin, according to Aon Australia's report titled “Directors & Officers (D&O) Insurance Market Insights - Q2 2018”.
The report provides an overview of the D&O insurance marketplace, which is:
- The D&O insurance market continues to harden for listed companies; however, it remains stable, with modest premium increases, for non-listed organisations.
- The securities class action environment remains active and, as a result, the market may see an increase in the average settlements.
- Unless substantial premium re-alignment can be secured, local insurers appetite for mid-large listed companies purchasing Side C cover remains limited; this is where the London market is playing a stronger role.
- Some insureds are exploring the economics of bearing increased retention of securities class actions risks in an attempt to mitigate premium increases.
- There is ongoing volatility ahead for listed companies; and non-listed companies should expect a stable market with modest increases in the short-medium term.
The report also says that insurers are becoming increasingly selective in relation to the risks they are prepared to insure and the terms upon which insurance will be provided. This is particularly evident in respect of insurer participation in the first A$100m ($74m) of coverage provided.
Increasingly, insurers are expecting insureds to bear some of the risk of a securities class action through the increase in minimum retentions for securities entity claims. In addition, Aon is seeing attempts by some insurers to extend this practice to retentions borne by the company in relation to the company’s reimbursement of Insured Persons under deeds of indemnity and the like. There is significant volatility regarding primary and low attachment excess pricing with insurers seeking substantial premium uplift, in many cases greater than 100%.
For some insureds, including those operating in market sectors with disruptors, or those with small market capitalisation, securities entity coverage is becoming less available. The London market is playing an increasingly important role in the placement of mid to large listed company risks due to capacity shortfalls or prohibitive pricing in the Australian market. It is clear that insurers are prepared to “walk away” if pricing for their exposure does not meet their minimum expectations.