David Thomas, Head of FI/D&O at AFL Insurance brokers shines a light on the challenges this complex class of business faces and why broker selection is of utmost importance
The environment and landscape in which directors and officers (D&O) navigate on a daily basis have become increasingly more complex and riskier. It goes without saying that the devastating global spread of Covid-19 has only exacerbated this.
Regulator, investor and public expectation of boards continues to intensify, and personal accountability for not meeting these expectations is ever increasing. In fact, the shift from corporate responsibility to personal responsibility continues at pace.
When these external expectations are not met, the need and desire to litigate has increasingly become the norm. This has now been given extra impetus by the continued emergence of collective actions, increased capital flow into shareholder activism and the growth of litigation funding.
Nowhere else in the world has this been demonstrated more clearly than in the US where we’ve seen a significant increase in securities class action litigation over the past several years with this trend not showing any signs of abating.
Already in the US, several securities class actions have been filed against corporations and their senior management directly or indirectly relating to Covid-19.
Given how quickly the virus has been spreading, how inconsistent the approaches of governments have been, and the already significant impact it has had on financial markets, global economy and commerce in general, it is very difficult for directors and officers to ensure they are responding effectively to what is a continually evolving crisis and, more importantly, that they have protection in place to give them the confidence to make these difficult decisions.
Pre-Covid-19, D&O insurance was already one of the hardest classes in the market and, in all honestly, the market’s perception was that it surely couldn’t get any more problematic! Rate increases have been building during the past 18 -24 months, and from where we’re sitting, we don’t see this letting up anytime soon. It’s now very important to acknowledge this because it has real importance on how we as brokers respond and act during these difficult times.
Driven by complex and costly US securities class actions and an evolving legal environment, markets have drawn firm lines as to the rate hikes that need to be achieved and we don’t believe we’ve hit the peak yet.
It’s fair to say that the hard market isn’t going anywhere fast and it will be vital for brokers to properly manage client expectations in this regard, even more so than before. That is a comment used so frequently, but we still believe there is a huge difference between saying that you manage expectations and actually managing them.
Unfortunately for some, there will be some very difficult times ahead but, from AFLs standpoint, this is what we been expecting and in some ways looking forward to because it’s now that we can truly demonstrate how to add value – and what that value looks and feels like.
Excelling in a hard market
From our perspective, when it comes to advising on and executing solutions in the global D&O marketplace, a hard market will always be on the horizon especially after a very long period of soft market trading conditions.
AFL’s truly independent position has allowed us to be nimble, proactive and to embrace the current challenges. Not many brokers can stand there and say what we’re saying and believe for that matter. With our truly independent nature comes a distinct absence of barriers or conflict that often gets in the way of clients choosing the right broker to entrust their business with.
We have always approached the way we conduct business in a soft market similar to that in a hard market – for us, there is no difference in the way we operate which is paying dividends in today’s market. The ability to understand the environment we operate in and how to operate effectively in this environment is so important, and that’s why we have spent and invested a lot of time and capital in recruiting the right people for the job at hand.
Communicating market conditions and dynamics, and the reasons behind them, has never been more important and it is imperative to be crystal clear and on point about why clients premiums are seeing substantial increases. An alarmingly consistently high level of class actions, significant volume and value claims and reduced capacity have all contributed to creating a perfect storm for this class. This has now become a high frequency and high value severity of business. The ability to demonstrate and evidence this to our clients, through both relying on our experience and our ability to explain what we’re seeing through an understanding of complex and historic loss data, adds so much value to the process.
As a pure independent broker with access to global markets, we’ve always been thinking about ways to explore alternative and often difficult solutions to solve our clients problems. We have broad and long-standing market access and relationships not only within Lloyd’s, but also in other global insurance hubs such as in the US, Bermuda and Asia.
Time will only tell what the real impact of Covid-19 will be on the D&O market, but it’s important to remember that this market was challenging prior to the pandemic and that this is something we’ve been preparing for, for a long time.
The most important decision that clients will make during these challenging times are that of broker selection and, dependent on that choice, results can greatly differ. Appointing a broker that understands the sector, its challenges and market dynamics will ultimately be the most prudent decision clients will ever make – we have no doubt, we are that broker.