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Take These 4 Steps to Communicate a Still-Challenging D&O Market to Business Leaders

Recommendations to help prepare your leadership for challenging news about current hard-market conditions

Most companies currently face a stressful combination of increasing D&O rates and retentions, and restricted capacity, putting risk managers in a tough position at renewal time. It’s important to communicate the realities of the market to your stakeholders, who aren’t used to seeing year-over-year material changes to D&O coverages and premiums. It’s also important to help them understand your company’s unique risk position within the larger market context.

 

In the fourth quarter of 2021, D&O pricing for public companies grew 36 percent.

Source: Quarterly D&O Pricing Index, Fourth Quarter 2021

 

In the second quarter of 2021, D&O pricing for public companies rose 29%.[1] D&O pricing has moderated somewhat as new capacity has started to enter the market. A rise in emerging risks, including a variety of COVID-19 pandemic-related issues, increased event-driven litigation, and more continue to contribute to the still-firm D&O market. Additionally, underwriters continue to look carefully at Special Purpose Acquisition Company (SPACs), which lack litigation history, but currently carry an increased risk of securities class-action lawsuits. Managing the SPAC process properly is key to reducing litigation risk.[2]

In these times of increased risk to directors and officers, here are the practical steps risk managers should take to prepare to meet with the C-suite, general counsel and the board.

 

Start early and highlight successes

Don’t surprise your stakeholders with the news of a rate increase a few days before renewal. Experts recommend that risk managers start the conversation three to four months in advance of renewal, if not sooner. It is crucial that you manage the message, particularly in a challenging market. Frequent, open and transparent communication with your stakeholders is vital.

Arrive to the first conversation prepared to tell stakeholders what the premiums and coverage will likely be, considering the still-firm market. In the most successful meetings, the risk manager transparently shares the process that led to their conclusions.

Once you’ve initially established the challenging situation, you'll be able to highlight relative successes. Those may include getting an increase on the lower end of the company’s peer group, the ability to reduce the original number the insurer gave you, and more collaboration among risk, finance and legal departments.

 

Bring best-in-class data and analytics

It’s crucial to use data and analytics to build the narrative around your recommendations. With a renewal cycle that remains challenging, despite rate moderations, your opinion or the broker’s will likely not suffice. You need numbers.

Historically, risk managers haven’t used data and analytics to take a holistic view of the company’s risk profile in the annual renewal—but in this market, it’s critical. Using an analytics platform can help provide an in-depth look at securities class actions, your balance sheet and the probability of a claim hitting your Side A program, and help bring the data together in a way that strengthens your narrative.

Look at these factors outside of your company’s specific circumstances:

 

Market data

Alongside data about your “controllables”—your company and its risk mitigation tactics—stakeholders need to understand the “uncontrollables” as well: what’s happening in the macro market. For example, there’s a higher likelihood of D&O litigation within the first three years after a company’s IPO. If you’re affected by this macro issue, think through how to address it from your own risk mitigation standpoint. The goal is to create a narrative for the upcoming underwriting meeting that demonstrates that you recognize the risk and are taking proactive action.

Market data

Look at the limits of your peer companies, but keep in mind that the limits peer companies bought aren’t necessarily appropriate limits for you. To help the board feel comfortable with the limit available to you, share the peer benchmarking data and context around the factors that go into overall limit of liability decisions such as board preference, historical cost, availability of capacity or public float.

Market data

Some sectors have a higher frequency of claims, such as life science and technology. Your broker can equip you with data specific to your industry that you can share with stakeholders.

Market data

You should also consider pricing data, historical modeling, predictive modeling and stock drop analysis alongside data showing that you’ve secured the market clearing price; best-in-class terms and conditions; and that you have exhausted the marketplace in search of market-leading D&O policy outcomes.

 

Market data

Alongside data about your “controllables”—your company and its risk mitigation tactics—stakeholders need to understand the “uncontrollables” as well: what’s happening in the macro market. For example, there’s a higher likelihood of D&O litigation within the first three years after a company’s IPO. If you’re affected by this macro issue, think through how to address it from your own risk mitigation standpoint. The goal is to create a narrative for the upcoming underwriting meeting that demonstrates that you recognize the risk and are taking proactive action.

Limit data

Look at the limits of your peer companies, but keep in mind that the limits peer companies bought aren’t necessarily appropriate limits for you. To help the board feel comfortable with the limit available to you, share the peer benchmarking data and context around the factors that go into overall limit of liability decisions such as board preference, historical cost, availability of capacity or public float.  

Claims data

Some sectors have a higher frequency of claims, such as life science and technology. Your broker can equip you with data specific to your industry that you can share with stakeholders.

Other data

You should also consider pricing data, historical modeling, predictive modeling and stock drop analysis alongside data showing that you’ve secured the market clearing price; best-in-class terms and conditions; and that you have exhausted the marketplace in search of market-leading D&O policy outcomes.

 

Anticipate your audience’s questions

Each of your stakeholders will focus on a different element of the renewal. As a general matter, the CFO will be concerned about balance sheet protection, the general counsel will be concerned about contract certainty and coverage, and the board will be concerned about both factors, as well as their personal protection. Keep in mind that board members will be personally liable if the insurance doesn’t protect them. They may feel exposed, especially if they’re slightly removed from day-to-day operations.

Some potential questions you should be prepared to answer:

  • Will we be able to renew with the coverage we had before?
  • Why is the market behaving like this?
  • Are the changes in our program due to our company’s D&O exposures or is this market-driven?
  • Can we get a better result by addressing our risk, or is this just the market?
  • Have you gone to every market to make sure we can’t find the capacity?
  • What are similar companies doing?
  • Have you thought about using a captive or other alternative structure?
  • What was the process behind your recommendations? What data did you look at?
  • Where are you investing in relationships with the insurance markets? Are you leveraging your political capital?
  • How much overall coverage do you have with any one market and have we been loss free?
  • Will we have to take a large retention, and do we have the balance sheet to retain it?
  • What is the right limit to make sure we’re adequately protected if we do have a claim?

 

It's important for stakeholders to understand that, even though insurance lines are mostly siloed, there's still some aggregation. Differentiate for them between market-driven increases and risk-specific increases, even though they may not be thrilled with either.

 

It’s important for stakeholders to understand that, even though insurance lines are mostly siloed, there’s still some aggregation. Differentiate for them between market-driven increases and risk-specific increases, even though they may not be thrilled with either.

 

Make it an ongoing conversation

The key to navigating a challenging renewal is keeping the internal channels of communication open for the months leading up, not having a one-time conversation. Try to attend most of the board meetings and create a feedback loop where you bring them the latest information and they can advise you of their risk tolerance. Preparing for a renewal should be a two-way conversation, so the stakeholders have a chance to share their firm parameters and give you a definition of success.

There will be good and bad surprises over time, so if you've correctly oriented the conversation so the stakeholders have all the context they need, they'll be able to see the good news for what it is. And during this hard market, that is a success.  

[1] Quarterly D&O Pricing Index, Fourth Quarter 2020

[2] SPACs Are Growing, So Is SPAC Litigation – and It’s Impacting the D&O Market | Aon