There’s no doubt that insurance premiums are on the rise. This is particularly true for Director’s and Officer’s (D&O) Insurance.
According to research quoted by the Australian Financial Review, “D&O premiums increased on average by 229 per cent for ASX 200-listed companies over the previous reporting period and average corporate D&O spending rose 173 per cent…”
Why are companies experiencing such substantial rises in D&O insurance premiums?
You may be inclined to immediately point to COVID-19, but this is just one part of the bigger picture. D&O premiums have, in fact, been on a steady rise years before the pandemic. This is primarily because the number of claims (such as class action lawsuits and derivative actions) relative to premiums being paid have been at an increase. This, compounded by the devastations caused by 2020’s pandemic, cyberattacks, global events and natural disasters has aggravated this increase even further.
According to The Australian Financial Review, “Six insurers stopped issuing D&O products over the year, prompting Mr Armour [Angus Armour, chief executive of the Australian Institute of Company Directors] to warn that a lack of capital inflow into the market would continue to push premiums higher and reduce coverage.”
The rise in premiums have particularly impacted non-for-profits, with some Directors choosing not to be insured despite being exposed to significant risk.
D&O Insurance comprises 3 parts:
- Side A
Side A comprises of Directors Liability for liabilities and legal defence costs arising from wrongful acts in their capacity as directors or officers. It essentially provides cover for past and present directors and executives.
- Side B
Side B is for Company Reimbursement of Directors Liability where the company is liable to indemnify directors such as under a Deed of Indemnity.
- Side C
Side C is for claims arising from public trading of securities such as securities market conduct breaches
See also: IPO Insurance.
As well as the rise in premiums, there has been a decrease in cover provided with D&O Insurance. Research quoted by AFR states that “the limit on Side C coverage decreased by 28 per cent over the reporting period, which covers the 12 months from Q3 2019 to Q3 2020; and the limit on Side A, B and AB decreased by 16 per cent.”
What does this mean for you as a Director?
The first thing we need to do is accept that the rise in premiums won’t go anywhere anytime soon. This being said, however, there are strategies we use with our clients (in both publicly listed and private companies) that help mitigate these rising costs while maintaining applicable cover.
Some strategies, which I detailed in this previous post, include:
- Preparing for your renewal early. We recommend that clients start preparing for their business insurance renewal at least 4 months before their renewal date.
- Understanding your risks. One tip is to review your key exposures and document how you manage each one to reduce these risks. Drill down on your business profile – have the facts ready early. It may work to your favour if you are able to demonstrate how you manage these risks.
- Risk Disclosure – Be clear about how your organisation manages disclosure of material events to shareholders. Promote your organisation’s experience in managing public company exposure if relevant.
- Working with a qualified broker. Working with a licensed, reliable broker who has dealt with the complexities of D&O Insurance can potentially help you manage your rising premiums while also providing sound, strategic insurance advisory.
Other factors you need to be aware of include:
- Working with insurance brokers and other loss control experts to understand where you are exposed, then implementing strategies to mitigate those risks
- If going public, invest in IPO Insurance from the get go. The advantage of the stand-alone IPO insurance is that it ring fences the IPO exposure from the annual Directors’ & Officers (D&O) Insurance policy, which can prove a more cost effective solution in the long term.
- Utilise captive or indemnification trusts. In some cases organisations can elect to “self-insure” via risk transfer vehicles such as the establishment of a captive insurance vehicle or by utlising a protected cell captive. There is also the option of a trust vehicle that can be more cost effective that a captive solution in respect of the establishment costs. The risk transfer structure is then re-insured in excess of the risk capital invested in the established legal entity. The benefit is the risk is still transferred off the companies balance sheet whilst maintaining the principle of self-insurance.
As grim as the outlook may be for companies needing insurance, there is still room for maneuverability. If you’re considering new insurance options or need to find methods to combat rising premiums, I highly recommend speaking to your broker. Based on our experience with clients, you may be surprised at the cost opportunities available to you.
This article was written by Tony Venning,
Managing Director at Crucial Insurance and Risk Advisors.
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