The market for Directors' & Officers' (D&O) insurance in Australia is experiencing the hardest conditions ever seen and is likely to become even more restrictive in coming years as insurers rein in capacity and coverage, a report released today says.

The amount of D&O capacity sits at just a third of levels three years ago, Chief Client Officer at Marsh Steve Walsh says.

Marsh jointly released the “Under pressure: D&O insurance in a hard market” publication with the NZ Institute of Directors and MinterEllisonRuddWatts.

“From the insurance perspective … they are really looking at ‘Do we want to actually insure you?’,” Mr Walsh says. “There is much more scrutiny around that and the impact then is obviously in relation to premiums, how much capacity they are prepared to offer and the introduction of new excesses.”

Availability of coverage is being impacted by Australasian claims and the withdrawal of insurers, resulting in increased pricing and coverage restrictions. Insurers are increasingly cautious when considering renewals or applications, often requiring greater access to organisations and their boards. Premiums and excesses are climbing and some insurers are exiting the market altogether.

The D&O insurance industry is estimated to have under reserved for losses by somewhere between $3 billion to $5 billion in recent years, despite a significant rise in premiums. D&O claims payments in Australia and New Zealand have dwarfed the total insurance premium pool as litigation funders become more commonplace and as the regulatory environment evolves.

There are no signs of things getting better anytime soon, the report says, with underwriters scrutinising how companies of all sizes are going to recover from cyber attacks and COVID-19 adding to pressure, as are reporting requirements around climate change.

“The D&O insurance market is in a difficult state, and this is expected to continue for several years to come,” it says.

This is a vicious circle as with directors and entities under economic and structural pressure amid a more litigious backdrop, D&O insurance is more crucial than ever.

“The prediction of volatility has played out no end across the spectrum, from large dual-listed corporate clients and the contagion of that down into other entities--privately owned businesses, local and civic government entities, down even into the not-for-profits,” Mr Walsh says.

Securities class action litigation has been the largest contributor to D&O insurance losses, and other factors include culture and conduct reviews of banks and life insurers, the royal commission into financial services and an emerging class action and litigation funding environment.

“The number of D&O claims regionally are exceeding the total insurance market premium pool by a significant margin. As a result, renewals for D&O insurance are being increasingly scrutinised as insurers seek to rebalance their position through premium adjustments to compensate for claims and related costs,” the report says.

A significant number of insurers across Australasia have also withdrawn from insuring this class of insurance for listed companies, or quoting “such onerous restrictions on coverage that it effectively amounts to a de facto withdrawal,” the report says.

Some companies face the possibility of a D&O renewal outcome where there will be a reduced overall policy limit with increased excesses, reduced coverage and jump in premiums versus a year earlier.

Capacity available in the London D&O market alone for those companies with an ASX presence is 50% less than it was in 2017.

Coverage variations include investigation costs, separate defence costs, adequate cover for individual representation, insolvency claim exclusions and cover for capital raising or claims by majority shareholders.

Limitations in coverage through exclusions for cyber, anti-money laundering, and climate change and excesses of $10-20 million may be seen.

The COVID-19 pandemic has added further pressure, with insurers now quizzing regarding solvency, business continuity plans, the pandemic’s impact on employees and customers and for listed companies, how disclosures to shareholders are being managed. Some insurers are applying insolvency exclusions.

Directors should take an active role, meeting with insurers to “really dig down” and profile the risk.

“Good quality risks can still get the cover,” Mr Walsh says.

Click here for the full report.