The directors’ and officers’ (D&O) insurance sector has had a complicated few years, particularly where airline organisations are concerned. It had been relatively stable for the best part of two decades, but in 2019-20 prices for many organisations started to rise and coverage started to fall. COVID-19 then muddied the waters further. After a period of very hard markets however, price increases look like they are in the process of moderating, and capacity is being attracted back to the sector, explained Angus Duncan, Executive Director of D&O, WTW, at the final session of the WTW Airline Conference 2022.
“Exposures were up, claims were increasing, there was always likely to be a crunch”
Angus Duncan
Executive Director of D&O, WTW
Setting the scene, Duncan explained that the D&O market overall had enjoyed lots of competition for much of the two decades running up to 2019, and rates had not really risen during the period. “The problem was that while prices were stable, coverage continued to grow and regulators were putting more and more focus on the area, particularly after the 2008 financial crisis,” he explained. “Claims also rose, and it got to the point where if anyone attempted a listing, there was likely to be a claim against a D&O policy. Exposures were up, claims were increasing, there was always likely to be a crunch.”
The crunch arrived in 2019, when increasing claims and losses, coupled with rising investigation and defence costs, created a deficit between the premiums insurers were receiving and the payments they were having to make.
As a result, some insurers started to withdraw from the D&O insurance market in the UK. The level of competition fell and the insurers who did stay in the D&O market reduced their capacity, increased premiums and imposed stricter terms.
“…while the US security class actions were not the only reason for the increase in claims, they were a major factor”
Angus Duncan | Executive Director of D&O, WTW
The increase in claims was significantly impacted by federal security class action fillings in the US, particularly where mergers and acquisitions (M&A) were concerned. “D&O insurance for public companies frequently includes cover for securities claims, and while the US security class actions were not the only reason for the increase in claims, they were a major factor,” Duncan observes. “Much of the increase was the result of M&A claims being pursued in the federal courts. In the meantime, the federal courts have made it clear that they are not happy with this approach however, so the number of claims that pursue this route has significantly declined since the peak in 2019.”
The arrival of COVID-19 complicated the situation considerably however, particularly for the airline sector. The sudden reduction in the sector’s activity created a concern that some airlines might collapse, a process that created considerable risk of extensive D&O claims. “The impact of lockdown on the aviation sector led to insurers treating it as a much more challenged sector than it had been in the past, and there were even more significant premium increases and capacity restrictions,” Duncan explained. “Line sizes that had been at USD10 million fell to USD5 million and there was an expectation that firms would have to increase their self-insured retentions.”
“The impact of lockdown on the aviation sector led to insurers treating it as a much more challenged sector than it had been in the past”
Angus Duncan | Executive Director of D&O, WTW
While D&O notifications in 2020 and 2021 were down from the levels witnessed in 2018 and 2019, they are still high compared to the previous period from 2007 to 2015.
When prices rise in an established market where insurers believe that they have a good understanding of the risk they are exposed to, there is always a good chance that capacity will be attracted back into the market. The data for the end of 2021 and into 2022 so far certainly seems to support the suggestion that the markets are functioning efficiently and capacity is on its way back.
While some insurers still want increases, there is competition for D&O insurance programmes with good claims histories. The WTW D&O team’s current experience is that clients with programmes that suffered the most significant increases are the ones most likely to benefit from the new competition in the market and therefore have the best opportunity (assuming their claims histories are good) to see a discount on their renewal.
That said, the market is not returning to the status quo ante. A lot of the reasons why insurers were seeing losses on their D&O portfolios remain valid – there continues to be increased regulatory focus on director-level responsibility within companies and a lot of new legislation coming in that targets directors. Amongst these developments is the increasing legislation and regulatory focus on environmental, social and governance (ESG) risks which is placing new obligations on senior leadership teams. This is something the insurance market is keenly interested in, albeit that their response to these developments is still at an early stage.
“Insurers are happier looking at airlines after two years of very difficult conditions, so we expect that any increases will be moderate…”
Angus Duncan | Executive Director of D&O, WTW
As ever, the best advice is to work closely with your insurance partners and make sure that your insurance policy is well presented in the best possible light. “There is new capacity entering the market and while there is still some constriction, there are some good signs for D&O in the aviation sector” Duncan observes. “Insurers are happier looking at airlines after two years of very difficult conditions, so we expect that any increases will be moderate because the financials are returning to a better state. Watch this space, but the world is slowly coming back to normal.”
This ‘state-of-the-industry’ webinar series scheduled by WTW, supported the aviation sector by providing an opportunity for the industry to convene and discuss a broad spectrum of risk and insurance issues in what are proving to be challenging times for airlines.
