ANGUS DUNCAN: We've been tracking claims data since about 2007, and we can see that FIs tend to have overall more severe losses on average than they are for commercial D&O. The average FI loss is in the region of $25.2 million.
SPEAKER 1: Welcome to All Eyes on FIs, a podcast series from the WTW Financial Institutions team. Our experts have their eyes on risk management, regulatory changes, and coverage challenges faced by financial institutions of all kinds and sizes, from professional liability to crime and everything in between.
CAROLINE SAWYER: Hi. Welcome to All Eyes on FIs. In today's episode, we'll be talking about the differences between commercial insurance and financial institutions, or FI D&O insurance. I'm Caroline Sawyer, a Client Director in our UK FinX FI team. And I'd like to introduce my colleagues, John Orr and Angus Duncan.
John is our D&O Liability Product Leader for North America and Angus is our Global D&O Coverage Specialist based in our London office. When corporates on the one hand and financial institutions on the other seek D&O liability cover, they enter different insurance markets. So this means that even if their broker approaches the same insurance company or syndicate, they will deal with different underwriting teams who will negotiate policies with different terms and at different rates.
So our discussion today is to unpick some of those differences. Now before we start, it might be helpful to have a quick reminder of what D&O insurance is and who it's designed to cover. Angus, you OK to do the honors?
ANGUS DUNCAN: Absolutely. Thanks very much. So D&O insurance policies offer liability cover for company directors and officers, and for other people. So it's a wider definition than just directors and officers.
The purpose of the policy is to protect those people from claims which may arise from decisions and actions taken within the scope of their regular duties. So management of the business rather than the provision of services to clients. The D&O policy will pay for defense costs as well as financial losses. In addition, there's cover for costs of the insured persons generated by administrative, civil, and criminal proceedings and investigations by regulators. Policies cover the personal liability of the company directors and officers, but also the reimbursement of the company in case it has paid them-- in case it's paid the claim of a third party on behalf of the directors and officers in order to protect their directors and officers.
Policies may also cover the company itself in respect of securities claims. Some additional entity cover can be available that goes beyond securities claims, but that is usually restricted to private companies. And in the UK, actually, often restricted further than that to SME businesses.
CAROLINE SAWYER: Thanks, Angus. That's helpful context. Should we start off talking a little bit about claims? So really setting the scene with the risk environment in which financial institutions and corporates operate. I think it'd be interesting to explore, broadly speaking, do D&O losses differ between financial institutions and corporates? Could I perhaps ask you both for your thoughts, starting with John?
JOHN ORR: Sure. Thanks, Caroline. Yeah, they vary to a degree, but in recent years, not that differently. So setting the stage here, when we talk about D&O losses, those losses that really move the needle on pricing, we're really looking at large shareholder claims, securities, class actions, mostly side B and side C claims. So these are the corporate reimbursement part of the policy and then the coverage for the entity itself.
But securities litigation plaintiffs, they care much less about whether you're a financial institution or a commercial organization. They're looking at whether there was a significant stock price decline and whether there's a case to be made for securities fraud. Interestingly, last year, in 2023, one major analytical firm, found that financial institutions were the third-most sued industry behind electronic technology services and then health technology and services.
So for public company D&O claims, the differences between FI and commercial may be that FIs are generally a more sued industry than most other, but not all commercial industries. Private company D&O claims might not be much different either. But here, we're dealing with a combination of smaller middle market companies, larger private companies, not-for-profits. So in other words, companies that vary quite widely. As a highly generalized statement, WTW's own proprietary data shows that FI and commercial claim trends are similar, with there being fewer claims filed since 2018, and with severity tracking fairly evenly as well.
ANGUS DUNCAN: So we can look at our data in some more detail. We've been tracking claims data since about 2007. And we can see that FIs tend to have overall more severe losses on average than they are for commercial D&O. The average FI loss is in the region of $25.2 million, compared to the average commercial D&O loss of in the region of $8.4 million.
The largest, however, are actually relatively comparable in size. There's actually a large difference, but when you look at things of this size, the difference doesn't seem so big. So the largest FI loss is in the region of $1.4 billion, and the largest commercial D&O loss is in the region of $1.8 billion-- sorry, $1.08 billion.
We can also break that data down into industries and sectors to see within that, where the most claims which arise. So within FI, retail banking is the most frequent, and then asset management. And in commercial D&O, it's manufacturing, then mining and quarrying.
CAROLINE SAWYER: Thanks. Now John, you mentioned, I suppose, some of the differences between public and private companies. Do you think there is a more significant difference between those types of companies than between corporates and financial institutions?
JOHN ORR: Yeah. So for purposes of commercial risks, commercial risks really do consist of organizations other than FI. So we're thinking about retail, manufacturing, transportation, technology, others. The distinction between public company and private company D&O coverage in the US is rather noticeable. Entity coverage is broader in private company policies in the US.
In public company policies, entities are covered only for securities claims. All employees are covered, too, but only for securities claims if they're not an officer or director. Now there are going to be some exceptions there in many policies, but the general idea is that employees are covered in public company policies only for securities claims.
In contrast to that, in a private company policy, the entity's coverage is broader. It can cover many more types of commercial claims against the organizations brought by vendors, suppliers, competitors, others. There are more exclusions in a private company policy because of this. So there are exclusions specific to the entity such as intellectual property exclusions, contractual liability, product liability exclusions.
Other differences lie in how D&O claims are defended. In public company programs in the US, it's the insured that maintains the duty to defend, and it's that way around the world in many cases as well. In private company programs, the insurer most often has that duty. And then in some US jurisdictions such as in California, insureds might have the right to retain separate counsel.
And this is where the insurer is carrying out its duty to defend while also reserving its rights on substantive issues that could bear on coverage. So it's separate counsel that would come at the insurer's expense. So those are some of the differences that I would note.
CAROLINE SAWYER: Angus, are there any other differences or nuances that you think are worthy of note?
ANGUS DUNCAN: There are a few, but before I turn to other points, I did just want to touch on the points that John made, because some of those are actually quite specific to the US, and I think it is worth just mentioning that for example, in the London market, the difference between the coverage for insured persons in a public policy and a private policy is not really like the way it is in the US.
So in London market wordings, I would expect to see cover for employees for a number of bases, and it depends on the particular wording. But you would expect, generally speaking, for there to be cover for employees acting in a managerial or supervisory capacity, or language along those lines in both the public and the private policies in the UK. So that's just one of the differences you see between the US market and the UK market.
So just moving on from that and thinking about other differences that you see between policies, other categorizations rather than just FI versus commercial D&O. I think you've also got to look at SME versus large companies. And I think in the UK, we make more of that distinction when you're looking at private companies.
So SME businesses might be written on a policy that's based on a number of different schedules. So taking a PI, a commercial, a corporate legal liability section, an EPL section, and putting the D&O with that all as one policy and giving slightly sort of different coverage. You might get more entity coverage like the way you do in the US for private companies, whereas we would tend to confine that to the SME side of the business. Large, private companies in the UK are unlikely to benefit from that kind of coverage.
Another really important distinction is different jurisdictions. Obviously, different jurisdictions, they have very different attitudes to cover. There's very different laws that provide automatic coverage.
And so you do see big differences in D&O coverage. Plus, one of the major fundamental things about D&O coverage that we haven't really touched on is indemnification. And different jurisdictions will have different rules on indemnification that will be really quite fundamental for how the D&O insurance works in those jurisdictions.
Just finally on this section, I think another area to talk about potentially is regulatory exposure. And there, the FI sector is obviously a highly regulated sector, and that does generate. That's one of the reasons why it will have, on average, higher claims exposure or loss exposure.
But there are, in fact, of course, in sectors outside FI, very highly regulated sectors as well. So pharmaceuticals is another good example of a sector that is highly regulated and therefore, you do see sectors other than FI that still have that type of exposure. It's just that FI is a very specific area that underwriters choose to have a separate group of people underwriting.
CAROLINE SAWYER: Thanks, Angus. Now we've touched on a bit how policy exclusions and defense provisions can differ between the policies. Can we take a bit of time to reflect further on the differences between the terms that we see in commercial D&O and FI D&O policies a bit further.
So I suppose fundamentally, the policies are in place to cover individuals for claims made against them in their capacity managing the business. So overall, we'd expect the policy wordings to be more similar than they are different. But I suppose how does the nature of the business change the scope of cover? Could I ask each of you to give one or perhaps two examples that come to mind on this? Angus, perhaps we could start with you.
ANGUS DUNCAN: Yeah, sure. I mean, I think you're right. Absolutely that the broad coverage that you get in both policies is very, very similar between FI and commercial D&O. But one of the areas where you see differences is in the scope of the insured person definition.
So particularly when you're looking at the FI sector, you're more likely to see approved persons being included. If you're in-- for a business that's based in the UK, you're likely to see a reference to senior managers, possibly to certificated persons. And that caters for the senior managers and certificated persons regime in the UK.
And in fact, Ireland has just passed a similar regime, the Individual Accountability Framework and Senior Executive Accountability regime. And Australia has also done the same with their Financial Accountability Regime and Banking Executive Accountability Regime. So those types of things, you're likely to see covered in a insured person definition in an FI D&O policy. You might see them in some commercial D&O policies, but only normally where it has an FCA-regulated element, and therefore is in some fashion a financial institution of some kind.
I suppose I should also mention, we did discuss this in advance of this call today with an FI underwriter. And they flagged, of course, that actually, the definition of securities claims in FI policies is likely to be slightly more restrictive than the definition that you see in commercial D&O. Depending on the policy that you have, in commercial D&O, you may see cover for the entity for administrative or regulatory proceedings arising out of company wrongful acts, provided that the proceeding is also maintained against an insured person. But you're much less likely to see that type of cover in an FI policy.
JOHN ORR: Another area where you see differences between FI D&O and policies and those for commercial risks is in exclusions for professional liability or professional services. In FI policies, the interplay, the potential overlap between D&O and E&O coverages is more pronounced. You'll certainly see more professional services, exclusions, and D&O policies for financial institutions, less so for commercial risks, except-- except where in the US, you'll see them more in private company policies.
The distinction between public company and private company policies, as we talked about earlier, it's more evident in the US with entity coverage being much broader in private company policies. So you'll see more entity-focused, entity-specific exclusions. And I mentioned contractual liability exclusions.
But then among the other ones, there's the professional services exclusion. Not so much in policies for commercial public companies, except in some public company programs where the professional services that a company renders is so integral, so core to its operations. So you might see the exclusion in public life sciences companies. For example, health care companies may be another example.
ANGUS DUNCAN: John, if I can just jump in there, another area where you might see it, of course, is the law firms, because we do see increasing number of law firms taking out management liability policies. And obviously, given that their main business is professional services, they often see professional services exclusions as well. Accounting firms is another one, too.
JOHN ORR: Yeah. Very good examples. You'll find other distinctions, not just among FI and commercial D&O programs, but also within different FI segments. And here I'm thinking of asset managers, banks, insurance companies.
Unless they're public asset managers, will typically buy D&O and E&O in a package program. Mutual insurance companies will typically be written on a private company form, where entity coverage isn't always going to be offered, possibly except for securities claims. Private equity portfolio company programs have their own nuances as well. Larger public company banks will be on a standalone public company form as well. So again, we're not just talking about distinctions between FI and commercial here, we're talking about distinctions within FI.
ANGUS DUNCAN: And of course, it's worth mentioning, you already touched on it, John, that FIs quite often-- when they buy their E&O and their D&O together, that's quite often done on a blended policy basis and that is more common for FI. You don't tend to see it in commercial D&O.
There can be some advantages to doing that. Even if you don't have a shared aggregate limit, you can get consistent terms. You get policy conditions that are consistent. You get insurers that are consistent, which can simplify straight-- simplify things like claims handling, avoid lacunas in the cover, that type of thing.
On the other hand, of course, there is the potential downside of having all of your eggs in one basket, so to speak, that if you have an insurer that's declining your claim for any reason, then you've only got one policy and only one insurer that's responding. So there are pros and cons.
And of course, for commercial D&O, as we've said, often commercial D&O clients aren't buying FI or E&O policies at all, and therefore they don't need that blended approach. So that's another distinction that you tend to get in between FI and commercial D&O.
CAROLINE SAWYER: Thanks, Angus. Thanks, John, for those examples. Should we move on to talk about something which everyone's always interested in, and think it would be remiss of us not to discuss, which is the premium pricing. Now, anecdotally, historically, FI D&O insurance has been more expensive than commercial D&O insurance. And for those companies that could be classed as financial institutions or not, the preference tended to be to approach the commercial markets and to get better rates.
Now, however, when we compared the rate per million of D&O cover purchase for our WTW commercial clients versus our FI clients last year, it actually turned out that the commercial D&O insurance cover was marginally more expensive, contrary to our expectations. So I suppose I wondered if either of you had any thoughts around that? John, perhaps we could start with you.
JOHN ORR: Right. Very interesting findings on our part. I really do think that whether FI and commercial D&O premium is more costly, may depend on the different FI segments and which FI segment that you may be in. So, for example, where D&O and E&O coverages are included in packaged programs, it's more often the case that the money is in the E&O piece of that program. That's just where the greater exposure is.
So there, you'll pretty much see clearly that FI D&O is less costly than that of commercial counterparts. But the same might not be said of larger public company banks, for example. However, that's where the D&O risk can be seen as greater. But how might D&O rate changes differ among commercial and FI organizations?
In the US, the commercial D&O market is more substantial than the market for financial institutions, which is more of a specialty market. So on the one hand, D&O rates impacting commercial risks may have a spillover effect on the FI D&O market, and so the ups and downs may generally track each other. But those ups and downs might not track so evenly.
So you might see, for example, more volatile swings in the commercial state-- in the commercial space where the D&O market might get harder or softer for commercial risk and FI risks. But while the FI D&O market does experience swings, those swings might not be quite as volatile.
ANGUS DUNCAN: I think that must be right, that we're just-- I think the experience that our data shows of commercial D&O right now being slightly more expensive than FI D&O is-- I think that is going to be largely a factor of the swings in the market. We have had this massive swing where commercial D&O went from being extremely cheap up to being very expensive over a period of really just a couple of years, and then has come down again to being much cheaper. It still hasn't quite reached its low rates before, and I think FI is on a slightly different cycle because it didn't have that enormous peak that we saw in 2019 to 2021-22 in commercial D&O.
And therefore, FI just maybe slightly less expensive right now, purely as a result of where we are in our market cycle. It's surprising still, though, given how much commercial D&O has come down. So it shows that FI D&O right now is really pretty cheap.
CAROLINE SAWYER: Thank you. On that note, let's wrap up, then. This has been a really interesting discussion on some of the key differences between commercial D&O and FI D&O insurance. And we've touched on how the claims environment differs for these different types of businesses, and consequently how the policy terms and rates differ, and the nuances within the sectors and between public and private companies.
As always, if any listeners have any questions or would like to discuss this topic further, please do reach out to any of us or to your usual WTW contact. Thanks so much for listening to this episode of All Eyes on FIs.
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