Where brokers can find opportunity in a softer D&O market

After several years of a hard market, P&C industry executives report a plateau of price increases in directors and officers (D&O) lines.

As fears of pandemic-fuelled losses fade, D&O lines are becoming more profitable and that’s leading to some increased competition among players. Still, D&O market competition depends to some extent on whether a company is publicly or privately owned.

Opportunities for brokers in the D&O space are generally more favourable for publicly owned companies. In this market, underwriting uncertainty around potential pandemic losses has started to evaporate.

“This may be a classic case of, ‘What goes up must come down,’” said Ilan Serman, president of Ontario at Gallagher Canada of the public D&O market.

“In the last 12 months, it’s become increasingly clear public companies are not going to be on the hook for really large COVID claims. I think that’s what drove the sharp uptick in the pricing, and now the drop-off in the pricing.”

But in the private D&O space, uncertainty around COVID has been replaced by unease about a possible recession.

Headline inflation decreased from 4.4% in April 2023 to 3.3% in August, which is closer to the Bank of Canada’s 2% target rate. But this has been achieved by raising borrowing costs to 5%, the highest overnight interest rate Canada has seen for at least 10 years.

In theory, when consumer spending dips due to higher borrowing costs, the economy slows down. A recession happens when negative gross domestic product (GDP) growth happens over two consecutive quarters. To compensate, economists expect companies will cut costs and lay off some workers. This in turn increases D&O insurers’ claims costs.

“I think the D&O insurers of privately owned companies are going to be more cautious about bankruptcies,” said Patty McNeil, chief operating officer of Navacord’s Jones DesLauriers Insurance Management Inc.

“We keep feeling like we’re on the precipice of a recession, although we aren’t quite there. The economy’s been pretty resilient. But those pushes on interest rates…cause a whole bunch of other havoc for private D&O insurers…

“When a business is suffering, what do you do? You lay off people. For private D&O insurers, employment practices liability policies will be their biggest exposure. And that’s where [underwriters] are going to ask [clients] more questions around their employment practices.”

In addition, dismissals tend to trigger awareness of issues around diversity, equity and inclusion (DEI), as well as human rights tribunal issues.

The best way for businesses to lower their private D&O insurance premiums is to have solid balance sheets.

And publicly owned companies are advised to back up public statements about their environmental, social and governance (ESG) policies.

“Because what you say publicly is how you’re going to be held to account,” said Denise Hall, national broking director at Aon Canada. “How are you managing the [ESG] conversation in a way that’s authentic and realistic — and not only with shareholders, but with the government and your employees? That whole ESG conversation is not an easy thing. But underwriters are striving to underwrite it and understand it.

“That would be a thing for clients to talk about with underwriters. That would be the right area on which to focus.”

This story is excerpted from one that appeared in the August-September print edition of Canadian Underwriter. Feature image by iStock.com/coldsnowstorm