AIRMIC 2023: Brokers having to become more resourceful to place D&O risks

As the Airmic annual conference began in Manchester risk managers were warned that the falling  levels of directors & officers (D&O) insurance continue there are still areas which find themselves under pressure.

Broker Gallagher issued its D&O Market Update which found recent turmoil in the banking sector and a lack of funding options has many clients facing an uncertain short-term future. However, D&O insurance rates continue to be favourable, it added. As such companies have been able to save money, build back limits and introduce previously prohibitively expensive ancillary lines, such as Employment Practices Liability (EPL), Pension Trustees Liability (PTL) and Crime insurance.

Steve Bear, executive director at Gallagher and author of the report, told Emerging Risks the surprise in the report was the reduction in the premium rates in the US market.

“US premiums have been impacted by a reduction in securities class actions due to a fall in IPOs and M&A activity,” he explained. “The trend does point to good news for the UK and European and markets, as they tend to be a precursor for trends in Europe.”

On the pricing reductions Bear added: “Having seen a 50% reduction and then a subsequent 50% reduction the following year, you would have thought that a further 50% reduction at renewal this year would be improbable at best. I take my hat off to the brokers  who have been handling these accounts.

“Competition in the market is continuing  and we are seeing reductions in areas which were impacted by the COVID pandemic such as travel, tourism, leisure and aviation.”

However, one area where there is ongoing issues is for companies is the natural resource sector. The market has become more challenging due to the environmental impacts that it entails and the general move away from fossil fuels resulting in a fundamental change in businesses in the sectors and how D&O insurers view them, compared to 12 months ago.

The report warned insurers are paying close attention to the proportion of revenue generated by companies from fossil fuels, specifically oil sands and thermal coal. If there is a high exposure to these operations, it is likely that insurer’s terms will either be very expensive or not available at all. Instead, insurers want to see companies’ plans to transition away from these activities.

Directors also face potential legal actions from stakeholders, including shareholders and investors, who may argue that their companies’ continued investment in fossil fuels poses a financial risk. In this case, business leaders would need to demonstrate that they have taken steps to mitigate this risk to ensure a smooth transition towards renewable energy or, at least, have effected a change in any operations considered to have a negative impact under an ESG lens.

Business’ efforts to reduce their carbon footprint and drive ESG are also testing insurers’ appetites.

“For large and publicly traded companies, the risks posed by climate change reporting requirements are most relevant to their directors,” The report explained. “The level of disclosure required by countries globally is increasing, and directors need to ensure that their companies are meeting these requirements. This includes accurate reporting of their carbon emissions and climate-related risks.

“Directors must also ensure that their companies’ ESG disclosures are accurate and not misleading. The SEC’s Climate and ESG Task Force, set up in March 2021, has already reached a settlement in its first enforcement action. This highlights their increasing focus and scrutiny on these disclosures. We are already seeing allegations of misrepresentations in sustainability reports on the rise. Companies need to be aware of this risk and ensure that they are meeting the highest standards of ESG disclosure.”

Bear said there were those which took very rigid view on firms who operated in natural resources sectors, particularly those insurers where there was a high degree of involvement in fossil fuels, whilst others took a more nuanced view.

“We are finding insurers which have adopted a carte blanch stance to the sector,” he explained. “However, there are other who say that on the face of it a firm may have an involvement in fossil fuels, but that once you look deeper the story may not be so clear cut.

“What for instance if the company was using fossil fuels but they are doing so to deliver power for populations in remote areas of the world and that without the power those communities would be placed under extreme threat?

“If that is the case then this is not simply a fossil fuel issue but rather one where there is a clear social element. The world is moving to a renewable future but we have to recognise for instance that while every effort is being made to generate electricity from sustainable and renewal sources, at times of high demand there is a need to rely on more archaic systems.”