How Canada’s D&O and cyber insurance markets are shifting

Softer market conditions in Canada’s D&O insurance market have arrived, with ample capacity and decreased pricing in this class of business in 2023 Q3, according to Aon.

“The [Canadian D&O] market transition further accelerated in Q3, especially for public companies and excess layers,” Aon observes in its Q3 2022 Aon Global Market Insights. “Private companies experienced slight increases due primarily to inflation and rising legal costs.

“While underwriters remained prudent, they demonstrated increased flexibility. Capacity remained sufficient for most risks. Most insurers maintained their limit strategies, although some became more aggressive in offering increases. Looking ahead, the transition to a softer market environment is expected to continue as insurers focus on year-end growth targets.”

One factor not mentioned in Aon’s summary is that Quebec changed its laws earlier this year to exempt insurance contracts in Quebec from a legal requirement to pay for insurance defence costs above and beyond policy limits.

For almost 50 years, Article 2503 of the Civil Code had “subjected insurers insuring civil liability risks in Quebec to the obligation of assuming the defense of their insureds as well as the related costs,” as André Legrand, Thierry Dorval and Petra Vrtkova of Norton Rose Fulbright Canada LLP explained in a blog article for Mondaq. “These [legal] costs and expenses are in addition to the insurance amount and are therefore not subject to the coverage limits provided for in the insurance contract.”

That caused a crisis in the Quebec D&O insurance market, where the number of class action lawsuits and their related defence costs escalated over the years, as did disputes arising over evolving securities regulation. The rising insurance costs to defend these lawsuits were, by law, not subject to any policy limits. Insurers raised rates to compensate, and several withdrew from the D&O insurance market altogether.

Now that Canada’s D&O market is on the mend, it appears cyber remains a work in progress in the specialized commercial insurance portfolio.

The most recent OSFI statistics (2022 Q2) show Canadian cyber liability insurers are still reporting an unprofitable loss ratio (108.4%). Although that’s certainly a marked improvement over the industry’s cyber loss ratio of over 400% during the pandemic in 2021, Aon’s report suggests the hard market in Canadian cyber insurance continues.

Cyber pricing was up 11% to 30% in 2022 Q3 and insurers are still raising deductibles, as Aon notes in its report.

On the plus side, Aon observes, the Canadian cyber market had “ample” (as opposed to constrained or abundant) capacity, prudent (as opposed to rigorous or flexible) underwriting, “flat” limits and “stable” coverages (as opposed to broader or more restrictive) coverages.

“[Cyber] market conditions [in Canada] improved measurably in Q3,” Aon states. “However, a keen focus on minimum information and operational technology (IT/OT) security controls continued.

“New domestic and international capacity entered the market; for risks that met minimum standards, primary and excess capacity was broadly available while non-preferred risks—regardless of size—saw minimal insurer appetite and capacity. Price increases continued but moderated, most notably for larger risks.

“Looking ahead, market conditions are expected to continue to slowly improve for risks able to demonstrate strong IT/OT security controls. Coverage adjustments are expected for state-sponsored cyberattacks and other widespread cyber events as the insurability of these events continues to be questioned.”

Feature image courtesy of iStock.com/mohd izzuan