How D&O insurance is entering unknown territory

Gone are the days of directors and officers insurance being put to the test due to guidance misses or financial misstatements. Nowadays, the biggest threats are coming from so-called “bad news” events like product recalls, disasters and cyberattacks. And the worst part? You never know when a bad news event will strike.

That’s the biggest challenge identified by Allianz Global Corporate & Specialty’s latest report looking at D&O in the upcoming year.

Event-driven litigation has changed the game for the industry. So whether it’s a plane crash, a product recall or a cyberattack like – as was specifically pointed out in the report – the massive Marriott one that saw 383 million guest records and 18.5 million encrypted passport numbers breached in November 2018, these types of unforeseen events could tarnish a brand’s reputation, said Chris Mutcheson, Toronto-based head of financial lines in Canada at Allianz.

“So what always used to be more of a financial underwrite, it really has become understanding what that company’s event-driven risk is, and then trying to figure out how that company is managing that,” he told Canadian Underwriter.

Other challenges noted in the report, like environmental, social and governance (ESG) and climate change, tie back to the bad news events topic. That’s because, for example, the next climate disaster can come out of nowhere, Mutcheson said. There again is the unknown factor.

“Climate change is something D&O underwriters didn’t really focus on before,” he said “And with the nature of many of our Canadian clients being resource-driven, global companies, ESG is very big to us.”

It’s a major shifting of gears for the industry. These events can’t be underwritten nearly as easily because of the unpredictability of when they’ll happen and to what company. “So, D&O underwriting now is going to be portfolio management driven, limits management in the sense of capacity management, and diversification because we really don’t know what the next event is going to be,” Mutcheson said.

Mutcheson recalled a time when underwriting was more about risk selection. But when it’s event-driven, risk selection doesn’t exist. To combat that, the future will be about portfolio management and book diversification. It’s about making the portfolio strong to be able to absorb event-driven litigation.

“We have to rely on our actuaries and our technical pricing and realize that if we’re not trying to at least achieve the technical price that our actuaries suggest is needed for the whole book, then we’re not going to be ready for an event-driven exposure,” he explained.

These days, companies need to plan for two or three D&O hits throughout the year, so a $40 million book – which Mutcheson said is an average to big D&O book – can’t have a $25 million risk in it. “You have to have portfolio health to be able to sustain one, two, three unknown events per year. And we don’t know what the next unknown event is going to be.”