Despite warnings as early as 2014 that securities class actions were escalating in Australia, the domestic and overseas insurance markets have only really seen an impact on appetite, capacity and pricing over the last 12 to 18 months.
Whilst this rating and pricing correction is applicable to all Directors’ and Officers’ Liability and Management Liability products, the particular focus is on ASX-listed entities and where insurers provide Securities Entity Cover (known as Side C cover). As we enter into the busy season for Australia, there is no doubt that capacity and pricing will continue to change with an increasing challenge to place these risks.
Why has there been such a dramatic change in pricing and rating for D&O Insurance, and in particular for Side C?
As a background to this question, it is important to understand the cover this provides. Side C cover is Securities Entity Cover where insurers agree to cover not only the individual Directors and Officers but also the entity for securities claims. The need for this extension of cover came from a number of large securities claims in the USA in the late 1990s and early 2000s. These claims were made against both the Directors, which were covered under the D&O policy, and the Entity, which was not covered under D&O policy. Lengthy and costly disputes ensued to allocate the costs between covered and uncovered losses. A solution to this problem was to treat the Entity as a direct insured in respect of securities litigation, removing allocation arguments.
Aside from the notable class action against Centro Group, which settled for $200m in 2012, there have been very few securities claims in Australia that name individual directors as well as the Entity. Interestingly, this is in contrast to the USA where there very little evidence of class action lawsuits that only name the entity without also naming a Director. The overarching trend in Australian class actions is to bring the class against the Entity itself. In the early days of providing Side C cover, the policy would only respond where an individual director was also named along with the Entity. However, throughout the soft market this requirement dropped off providing pure entity cover. This increased exposure in Australia against the entity with little precedence of individuals being named as well has led to a major rating discrepancy between AB only cover and ABC cover.
How will this changing environment influence my placement strategy?
As the busy season for Australian renewals approaches, thought should be given to commencing D&O renewals for ASX-listed Entities early. As part of the pre-renewal process, a broker should be speaking to their incumbent markets early to get a general update on appetite and approach to these types of renewals. Significant shifts in underwriting appetite may lead to withdrawal or reduction of capacity, meaningful rate increases and restriction in the extent of cover, particularly in relation to Side C. Allowing additional time to negotiate the placement will assist where additional capacity or alternative options are required.
It is also important to understand the client’s priorities in relation to the protection sought. The Insured may be focused on only purchasing cover for the individual Directors and Officers to protect their interests or Securities Entity cover may be a high priority for the Board. An important point to note is that a large Securities Entity claim could exhaust the insurance cover originally intended for individuals only. An additional consideration is to add an excess Side A Protection policy to the programme to reduce the uncertainty of cover available for the Directors when Entity Cover is included. For more information on excess Side A Protection, please contact Louise Radford.
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How should I prepare my ASX-listed client for their D&O renewal?
Whilst most Board of Directors of ASX-listed entities will be aware of the increasing exposure of Securities Class Actions, it is important for them to understand the implications of this exposure on their D&O insurance. Early engagement with the Insured is key to explaining the impact of the litigation environment on their insurance programme.
Possible changes to highlight to the Insured include an increase in Side C deductibles (and a possible increase in Side B deductibles for Securities Claims), significant rating increases, reduction or withdrawal of capacity and in particular, Side C capacity and increasing underwriting scrutiny of relevant risk factors.
For any assistance in relation to the background of the changing D&O environment, increasing exposure of class actions, appetite of Lloyd’s of London insurers or placement needs please do not hesitate to contact Louise Radford.