Insurance risks for directors and officers

Developments in company director liability in New Zealand and Australia in the past three years have affected insurers’ perceptions of the risks faced by directors and officers. This has resulted in difficulties in obtaining and renewing Directors and Officers or ‘D&O’ insurance cover.

What have D&O insurers been doing?

Many insurers have demanded substantially higher premiums, in some cases multiples of prior years’ costs, even for reputable companies with good claims histories. At the same time, policy limits have reduced, exclusions from cover have been added and deductibles have increased.

Insurers are increasingly demanding more detailed information from insureds and have taken longer to provide quotes for cover and negotiate terms.

Insurers have also returned to what the industry refers to as “technical underwriting”, in which premiums and other terms are set by reference to technical actuarial assessments of risk rather than influenced by an insurer’s understanding of a client’s business and its specific risks and confidence in its management.

Exclusions from cover have continued to increase in scope. Most recently, insurers have been introducing exclusions for cover for certain types of cyber incident. This is particularly the case for Lloyd’s underwriters who have been obliged to report on their cyber risk coverage since the beginning of 2021. This has coincided to an extent with the growth of dedicated cyber insurance, although insurers, faced with increasing cyber claims, are also increasingly wary of writing cyber insurance as well. Insurers are also introducing insolvency exclusions for companies that appear less robust or that operate in challenging sectors, including those affected by the COVID-19 pandemic.

Listed companies and those about to list for the first time have seen the most significant challenges. Dual listed companies that appear on both the ASX and NZX have been particularly affected. Some, albeit for a range of reasons, have elected to de-list on one of the exchanges. This reflects insurers’ apprehension of the increased risk of claims against listed companies, which is driven primarily by the Australian experience of significant increases in the number and size of those claims in recent years. The New Zealand claims experience has been different but insurers – particularly foreign insurers – do not generally distinguish between the two markets.

Many companies have found their renewals in 2021 to have been less challenging than they were in the two previous years. This seems to reflect insurers’ comfort with premium levels following the dramatic increases of the past two years, combined with a relatively normal claims experience of late. However, premiums continue to increase and restrictions upon policy coverage continue to expand.

Listed companies and those about to list for the first time have seen the most significant challenges with dual listed companies that appear on both the ASX and NZX having been particularly affected.

Why has this been happening?

High value D&O cover is provided on a global scale, with primary cover often written in New Zealand but upper layers of cover written by Lloyd’s of London or in other overseas markets. This means that New Zealand is viewed as one part of a global market and international developments, or regional factors such as increasing claims in Australia, influence the availability and terms of cover for New Zealand.

The risk environment for directors in New Zealand also continues to change. Increased numbers of representative actions or ‘class actions’ by investors globally and an increasingly aggressive regulatory environment locally mean that New Zealand is no longer viewed as a relatively benign environment for director risk.

In addition to the large concerns referred to above, insurers are also increasingly concerned about other types of claims, such as:

  • cyber crime and cyber incidents;
  • COVID-19 related losses and insolvencies;
  • AML/CFT regulatory prosecutions;
  • claims arising from large scale or systemic sexual or other personal abuse which an organisation failed to prevent;
  • environment, Sustainability and Governance (ESG) obligations, including new reporting requirements; and
  • insolvency claims.

Which companies are most affected?

Public listed companies have seen the most significant increases in premiums and reductions in cover, reflecting insurers’ perceptions of their increased risk. However, the type of company and listing is important:

  • companies that are listed only on the NZX have the widest appeal of any listed companies to insurers;
  • insurers are more likely to consider companies that are listed on the NZX with foreign exempt status on the ASX, as for the most part they are entitled to comply only with relevant New Zealand rules;
  • companies that are fully dual listed on the NZX and the ASX are seeing no or very limited capacity from insurers.

In all cases insurers are reducing the limits of cover they are offering, to reduce their exposure.

What can companies do to improve their renewals?

  • Select and instruct an appropriate broker carefully.
  • Engage early with insurers. The process is taking longer and more time may be required.
  • Expect insurers to misunderstand your risk at first and that you will need to provide more information.
  • Expect to be more open with insurers about what the company is doing.
  • Provide information about company-specific risks and the risks facing the wider sector, including any mitigating factors. Insurers’ willingness to write cover has become more considered and the perceived quality of the risk for the company and its sector plays an increasingly significant role.
  • Expect lengthy and detailed questioning and demands to see procedures to reduce risk.
  • Consider bringing senior executives in to speak directly to insurers so they may see the people who are responsible for corporate governance in action. Brief them well.
  • Expect to explain why your risk is not the same as others and otherwise resolve insurer concerns. Consider using hard data and analytics. Legal help may be of value in explaining risk to insurers.
  • Consider priorities for cover and where cover limits may be appropriately reduced or combined for risks that are unlikely to occur together.
  • Expect to pay more and receive less. Do not expect to play insurers off against each other – it may work against you.

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