Richard Allen, EVP, Head of Professional Lines, Sompo International
As the impact of Covid-19 on businesses and economies becomes more apparent, the D&O insurance landscape is changing. What should risk managers look out for?
After the death of former US defence secretary Donald Rumsfeld last summer, few commentators could resist bringing up his “known unknowns and unknown unknowns” quote. As we view the changes wrought on our high streets by the pandemic: once bustling food outlets empty, some boarded up, clothing retailers gone the same way, it seems an apt metaphor for the realities of the post-pandemic world. A very different business landscape and a host of questions.
As with many other aspects of business, Covid-19 will undoubtedly have a significant effect on the demand for and supply of D&O insurance. Rewind to the months immediately prior to the pandemic and the D&O market had already started to undergo a systemic shift. Following an exceptionally long soft market, the tide started to turn. The previous abundance of capacity was being eroded as carriers began to either reduce their line sizes or pull out altogether, responding to a heightened claims activity, litigation, and a growing recognition that the D&O product had been under-priced by underwriters for the exposures they were taking on. With the reduction in capacity, rates moved onto an upwards trajectory.
Then Covid struck. The simple reality for the London D&O market back in 2020 was that systemic change was about to affect global markets and economies – change on a scale not seen before. Underwriters could see that the pandemic was about to pull the rug from beneath a raft of businesses. On a personal note, I’ve been an underwriter for over 25 years and I’ve not encountered anything quite like this situation. 9/11 was a huge human tragedy; the financial crisis of 2007–8 was an economic tragedy driven by the behaviour of financial institutions. Both generated massive change but in a manner that was arguably more predictable. The causes of these two events were clear. By contrast, the pandemic is a catastrophe whose causes and effects may be debated for years. It has touched almost every aspect of our lives in a way that even the two events I mentioned did not.
So, what can buyers expect from their D&O underwriters? How are they likely to respond to the uncertainties that are to come? The first point to recognise is that the pandemic has produced both winners and losers. Alongside the hard-hit business sectors are the online retailers, the food delivery companies and the tech businesses like Zoom that have seen usage and profits rise dramatically. Burger giant McDonald’s has announced a major expansion in the UK market while Asian food specialist Itsu is to open 100 new stores here. Common sense would suggest that these are not businesses suffering too greatly.
On the other hand, clothing retailer Gap has announced it is to close all its stores in the UK. ‘Bricks’n’mortar’ fashion retailers along with the travel and hospitality sectors are bearing the brunt of the pandemic’s impact on people’s behaviour. But other sectors also have questions looming over them, some of these which could play out over the long term. Big pharma has done a tremendous job rolling out vaccines so rapidly but the possibility of litigation relating to side-effects does linger. Equally, suppliers of personal protective equipment (PPE) may find themselves being challenged over the effectiveness of their product or the manner in which contracts to supply it were obtained.
For underwriters, this means that they will be looking even more closely at risk selection to manage their portfolios in the pandemic’s aftermath. Risks will be scrutinised more closely as will supporting information. Those sectors most affected will probably face higher premiums for D&O cover alongside more tailored terms and conditions. Certainly, these businesses will struggle to get higher limits if they seek them. With this in mind, it’s critical that clients, brokers and insurers work more closely together for the long-term mutual benefit of all stakeholders. As ever with D&O, it’s the length of the tail that can cause the big issues. One recently paid claim in the London market relating to a European car manufacturer was notified as long ago as 2015. On that basis, we could still find ourselves dealing with pandemic-related matters in the late 2020s.
As I write this in early September, the questions about which businesses will fill empty units and how companies will return to their offices are now top of everyone’s mind. For D&O underwriters, the questions are as complex, likely to last far longer and the answers will not be simple.