Episode 2: Directors & Officers Insurance
In this Podcast we discuss Directors and Officers Insurance with Thom Anderson-Nicholls and Darren Schwartz from EBM.
In this podcast, we have provided general advice only and not personal advice. In giving this advice, we have not considered your personal circumstances.
Welcome to Episode Two of EBM Insights, a podcast that discusses current topics around insurance and risk management. My name is Sandy Cattley. Thank you for joining us. Last podcast our Q&A session with Ryan Cameron Director of Broking at EBM focused on the differences between the hard and soft insurance market. During this chat, we discussed how these differences can impact on the ability to place an insurance programme. In this segment, I'm joined by Tom Anderson-Nichols and Darren Schwartz, both from EBM, who will explain how the current hard market is impacting on placing directors and officers insurance. Welcome, Tom and Darren.
Thank you for joining me. So to start things off, for those who missed our last podcast, could you briefly explain the differences between a hard and soft insurance market?
In a soft market, they've got a lot more control, we can influence markets, we've got the ability to negotiate with various insurers over terms of conditions and premiums in a hard market, a lot more of the control and the power rests with insurers because they're the ones who've got the capacity in the palms of their hands. And the clients are the ones who need the product. It's a supply and demand issue for me, down towards you.
Yeah, look, it definitely feeds into self really, because the insurers definitely do have that control at the moment. And they're all beating the drum of a hard market, even though you know, some of the returns haven't looked too bad across some of their portfolios, has started to sort of level off a little bit with regards to a few classes of insurance directors and officers has been very problematic. And I suppose that's been driven by some pretty significant losses that hadn't really made too much money in the last sort of five years, maybe even 10 years, possibly. So that, you know, sector is definitely a challenge. Financial returns, which Ryan probably would have got across, you know, isn't great for the insurance, so where they could offset some of their underwriting results previously. They can't do that anymore. So there's a much more bigger focus on underwriting profit. Yeah, because that's where they're going to make the money rather than the financial returns. So, yeah, all those things. It's not just one single class. It's a lot of classes.
I think D and O historically had a problem before we hit this market condition being super hard. It was already a problematic class. And now we're in the thick of a hard market and I think those problems are adding multiplying factors to the issue level.
Okay. All right. So what is the purpose of D & O insurance?
It's really to protect the individual directors and officers from liabilities that they may incur for alleged wrongful acts, errors or omissions in the performance of their duties as a director or Officer of a company. That's what it really boils down to in the history of D & O is to protect the individual director and officer not so much the company itself, because a company can look after itself, is where you started to get those personal liabilities, you know, taking action against that individual. And that spirit sort of stems from a reasonably relatively new class of insurance within Australia, it's really, you know, became prominent in the 1980s. Around that sort of period was in the US prior to that. Yeah, it's really grown since that time.
The just to add to that, it's really designed to give directors confidence to go out and make business decisions and feel like they've got those protections to make decisions on behalf of the company and feel that there is protections for their personal accountability. Interestingly enough, one of the major issues which I'm sure we'll come on to later on this chat will be the, the conflict around what they call side c coverage, which is securities cover, or think of it as your book balance sheet protection for securities claims. If you think about the name directors and officers, it's interesting, they also add a separate section which is really company Type Cover into it as well which has been one of the major issues. That's facing a lot of insurers at the moment.
Yeah, look, I mean, even without directors and officers insurance, typically, the individual directors or officers should have a level of protection from the company itself. Generally, there's a company charter, the Corporations Act as indemnities, that the company says, Yeah, if you have an action against you will provide that protection and cover legal costs and things like that. But the issue is, is what if there's no funds within the company, if there's insolvency issues, there's no money to pay the individual directors, you know, legal expenses, or if there is an argument between the actual company and that individual director, and they say, no, we're not going to give you that indemnification. That's where, you know, individual directors and officers want a D and O policy in place, just so they do have that level of comfort, that there is going to be some protection for them. They're just in recent years, more and more companies in Australia are turning to D and O coverage due to litigation. Why is this do you think?
It's really just an increasing regulatory framework, the amount of legislation out there, I think there's probably over five to 600 pieces of legislation that, you know, directors may be faced with, obviously, not all industries, whatever. But that's just the framework, Australia's a sink, a lot of legislation in place, a lot of laws, a lot of scrutiny, you know, Royal commissions, there's a lot of constant disclosure obligations. There's the amount of potential fines and penalties that they can be faced with. It's, it's a pretty heavily litigious environment that they operate in. And there are a lot of individuals, government bodies and other corporations that are happy to pursue losses if they feel that they're entitled to them.
And those government agencies are pretty well funded as well. So they've got a fair bit of teeth in can make life hell, obviously, they're there for a reason for consumer protection and environmental protection,
those kinds of things. But sometimes they do have their own agendas as well and want to make a bit of a name for themselves to go after the bigger guys. And I suppose justify their existence as well.
Yeah. I mean, interesting. I've also read that Australia is now second only to the US, where a company is likely to face a significant class action lawsuit is quite interesting indeed.
Yeah, not definitely. And that's probably what we just touched on, as well, in so far as having a lot of legislation in place. And really just, I suppose aggressive legal firms, as well as litigation funders, quite happy to fund some of those bigger class actions against our companies. And there's even a debate going with regards to what Tom was saying earlier about the side sea cover is also that argument that the actual availability of side C cover is probably driven, some of that sort of litigation sort of funding, because they know that there's an insurance pocket to chase after and they're not chasing after the actual company itself. So yeah, a lot of that is sort of like seems to feed in on itself a little bit.
And historically, the major sectors that this would probably happen to be the bigger end of town is where you see a lot of the class actions, there's a lot more of an insurance bucket to be attacked. But that does not mean that the smaller guys immune to that. There are lots of considerations when your client is buying D and O as to how much protection they want, the limits they set and the end premium that they're going to end up having to pay to get that cover in place. Some sectors are probably more litigious than others. For examples of high volumes of perhaps blue collar workers might see greater volume of employment practices claims against them. You might have an IT sector company with greater exposure to privacy breaches and notifiable data breaches issues. Those are the sort of things where you can see a clear link between a number of major issues and perhaps in the media currently, and we've all seen high profile cases for sexual harassment, workplace bullying, discrimination claims, and they're not really attached to any one sector. It could be anybody.
And look, there's definitely a focus on the current COVID-19 situation as well as every insurer has got their own sort of questionnaire about, you know how the company is managing that because they think there's going to be some longtail claims against management. If they don't manage this situation. Well, or there's concerns about employee safety or client safety or other areas solvency. A big concern for insurers is whether you're once the job keeper dries up once the job keeper in the stimulus starts to dry up, how solvent is your company, because I think there's concern that there's a bit of a cushioning effect. And there's potentially companies who may have needed to shut their doors, but they haven't because government's propping them up. And that's something that they're very keen to look at.
Definitely interesting times ahead for everyone. During the time, we touched on previously how Australia is now second only to the US when it comes to litigation and lawsuits. How is that impacting on the price component for D&O insurance?
Well, it's obviously had a major impact, as you'd expect, issues Darren touched on earlier have seen some significant loss in this space, where previously, clients may have been having what they saw as an affordable, proper, unnecessary product. That premium from even in the last 12 months could potentially gone up by 50%. Or the other impact is that it may have been that the insurer simply doesn't want to put out the same level of cover, or restricted it considerably as part of the remediation as they would call it. Have you seen some significant price?
Yeah, definitely. And that probably happened even before COVID might have even been happening around 18 to 24 months ago in the in the D and O space where there was a bit of financial instability, particularly in the sort of mining space. So there was a little bit more scrutiny a few players are becoming more conservative, though quite aggressive in the past with their pricing and writing a lot of business. Whereas I then had a change in underwriting position. And so then the other players who might be a little bit more expensive, were then picking up that business and that's driven, some of the price increases and it but over the last sort of probably six to 12 months, it's really sort of accelerated, the price increases. And because sometimes it's not a matter of about the price increase, it's actually about getting the actual cover for the client. And some clients, probably more challenged industries, would have probably seen some very significant increases, not just 30 40%. But yeah, there might have been planned, say 2020 for five mil previously, and they could go up to potentially 80 to 100. In some of those sort of challenged industries. So it's definitely very significant increases in we are discussing renewals or when we're meeting new clients, the conversation usually ends up steering from a pricing consideration to what covers the insurance is still prepared to provide much which ones they're going to exclude. Often we're seeing the really heavy underwriting around issues of the board stability, the future cash flows of the business, what the overall disclosures have been to the market over the past 1224 months. They're no longer just looking at a piece of paper and running it through a writer, they are really looking at all sorts of aspects of the business and wanting to understand and feel comfortable that it's a business. they're prepared to put their paper behind.
And it comes down to the areas of operation sometimes as well. Yeah. I mean, the big one at the minute is the coal industry. If you've got anything to do with the coal industry, it's pretty hard from an insurance perspective D and O property liability across the board, so they're being much more selective for certain industries.
To the point even where even if you're even exposed to cold, they'll often engage with you.
When you're working on a D & O insurance programme for a client, are there particular areas you look at?
Look, we probably look at the same areas that the insurers are going to look at as well. And Tom touched on a little bit with regards to The financial stability, the long range forecast, cash flow, stability of the of the board their areas of operation, you know, there's sometimes if they've got a fair bit of activity overseas that may be negative us exposures, also potentially negative or rated higher, or, you know, cover restrictions in place. There's a lot of companies on the ASX, which have a head office here, but don't have any actual activities. So if they've got over, if that's their profile, it's very difficult to get D & O insurance for them. Yeah, the sometimes you get multiple layers of companies where we've got considerations for conflicts of interest that need to be managed very carefully, outside directorship exposures, where members of the board are also sitting on other boards external to the company and could bring exposure from that aspect. As we said, it's the major increase in in underwriting scrutiny. It also means that turnaround times are a lot longer. So we are having to engage these conversations a lot earlier and be upfront with the fact that it's not simply a pricing issue, but the level of coverage that they can deserve out in the market.
Look, companies, major shareholders can also have an impact as well, if there's a high profile shareholder with 10% of the company, and, you know, they've been seen in the media to be fairly litigious or causing waves with governments or a classic example.
They would not provide any insurance to Tesla, as he was a major shareholder. And he’d been tweeting constantly caused a number of waves to the point where he had to ensure the directors himself.
Closer to home. Mr. Palmer? And he's got a lot of interest in a lot of mineral exploration companies, mining companies, so I'm sure they're having probably difficulties placing the D&O right now.
Right. So what approach do you advise for D and O cover?
At some point, clients will have a cap on how much they can spend on insurance. That's the reality from my perspective, we could continue saying, how much coverage should we get? As brokers, we don't want to be telling them that they have enough cover because that's a very dangerous position for us to take. But what will happen is that we will continue to provide increases and options for increased limits. And at some point, the client will turn around and say, That's too expensive. And the conversation will say its because the pricing becomes unrealistic for them or unsustainable, there will be a grey area, I think in the middle where they will need some guidance. We would never tell the client that they have enough insurance, but what we can tell them is look at things like your market capitalization, your structure, shareholder spread, who your major shareholders are, whether they're retail, whether they are sophisticated, whether they institutions, and help guide them or making their own decision, because ultimately, they are better informed as to what their own risks are. And we are as a broker.
Look, the first question I always ask is typically, what do you actually purchasing deed purchasing D&O insurance for? And typically, most of them will say, well, it's to protect directors and officers. So that's really what starts the conversation, because just going back to a lot of the issues in the current market is resulting from side C, which is eroding the premium pool because, you know, the average class actions, you know, 50 to 70 mil roughly. So, that's, that's where the insurers have been really hit. So insofar as the own profile, are you looking to protect the company or you're looking to protect individual directors and officers, and most of the clients that we probably deal with their purchasing DNO, really to protect the directors own liabilities. Hence, you know, that's where you have that discussion. Well, you probably don't need so I'd say cuz I'd say can erode the cover or the limit if it's a shared limit with the DNI. So that can be a bad situation to be in if you're a director having to fund liability because the company's taking the lion's share of the limit. So that's probably one of the primary concerns and there's some insurers that don't even offer side see, for that very reason. They say, Well, look,
I think, now that most of these are very few that do now office, I'd say, there's very limited
market. And definitely looking where possible continuity with the same insurer who's repeatable, has a good track record of claims management, and is going to be favourable for the client when they are managing that claim. You don't want to sort of chop and change this class of insurance because you want to build that premium pool. You know, where possible, obviously, if the car insurance going through difficulties and increasing premiums to ridiculous levels, well, then it's obviously you might need to make a change, but you try to get onto a good provider long term relationship and really build that relationship with them. Because, you know, they or we, as brokers don't want to be in a position where you put up with Maybe, yeah, maybe a smaller provider or one that is not as good as some of the the big sort of tier sort of DNA providers. And you have issues when it comes to client. So
what are the other issues with moving insurer is that you've got to be careful around the continuity of cover clause, that if you in this space, and the coverages that are being provided, an attractive premium might be provided by another insurer. However, you'd need to disclose all claims prior to moving which can cause some significant headaches. And mean that if you don't, and you've missed something that you should have disclosed, that continued cover is eroded. Whereas if you'd stayed with your current insurer, you'd have to protections from that long term relationship that you've established,
all important things to consider. Well, thank you, Darren, and Tom for joining me in the pod today. That was a very insightful, interestingly enough, we called ABM insights. So thank you. And thanks for joining me.
Thank you, joy. pleasure.
It's a wrap for this podcast of EBM insights. Thanks to our guests and for those of you listening in. If you'd like more information on any of the topics we've discussed, please contact AVM on one 307 double five double one two or visit EBM.com.au