Financial Lines 2023 Update

David Walters, Head of Financial Lines, reviews 2023 so far, highlighting the positive trends for the remainder of the year and into 2024.

Directors and Officers Liability Insurance

The ‘perfect storm’ that engulfed the Directors & Officers insurance market from 2018 – 2021 now feels like it has finally settled and for some is just a distant memory. The fundamental root cause of such volatility can be traced back to the increased frequency and severity of large US class actions, relative defence cost inflation, and increased regulatory scrutiny of both the public and more crucially the private business sectors. The fact that D&O insurance had been chronically under-priced and inadequately underwritten for many years did nothing to assist in maintaining a stable market platform.

Inevitably, the seemingly disproportionate premium increases and coverage restrictions that were imposed were poorly received by insurance buyers as their advisors struggled to make sense of such a chaotic marketplace. However, the market has now recovered as profitability returns - albeit with far more speed than was originally predicted. The speed of the returned buoyancy has been driven by new market entrants spotting opportunities for growth. The rapidity of recovery had surprised some commentators but, as history shows, a similar story played out in 2001/2 and therefore those of us with long memories were not shocked by the quickness of the bounce back.

The benefits to clients of the market stabilising are now being seen with premiums reducing by significant amounts, particularly for European and US traded companies where we have seen reductions of 66% evidenced in just one renewal cycle.

For purely UK domiciled companies reductions of up to 20% may be achievable but attention must be given to your engagement with the insurance market and how best to project the tailwind positives and embedded ES&G metrics unique to each company in the market pathfinder document produced by your placement broker. Before embarking upon the renewal process consider your prioritisation of the following three current positives in the prevailing trading environment:

  • 1. Limit Escalation
  • 2. Premium Reduction
  • 3. Coverage Improvement

All of the above benefits ought to be available and at PIB Insurance Brokers we would be pleased to assist in the process of how to strategically leverage the marketplace to the benefit of your long-term market relationship. Ultimately the value of any insurance is how it performs in the unfortunate event of a claim. To that end we encourage both our clients and underwriters to view the nature of their relationship with each other as in the same manner of a company with its shareholders, i.e., underwriters are key stakeholders in the clients business. Therefore, rather than mildly confrontational the relationship should be open and based on mutual respect and appreciation. We will be happy to develop our thinking on this piece with you.

Financial Institutions

The financial institutions market has not suffered from the same volatility as the commercial D&O market as it had maintained stronger pricing and capacity discipline during the relatively benign market cycles.

There are certain sectors that are viewed as being particularly challenging such as IFAs and Corporate Service Providers but generally appetite remains strong with consistency of approach over a long period of time.

This should be viewed as a positive trend in terms of client budgetary and process management.

Cyber Liability

The Cyber Liability marketplace is undergoing a correction every bit as dramatic as that seen in the D&O market. The overriding communality of contributary factors were:

  • Inadequate premium rating during the soft market cycle
  • Lack of sustainable underwriting metrics
  • A rising bank of claims notifications

The lack of a sustainable long-term market therefore again leads to a large degree of client dissatisfaction as underwriting metrics tighten and pricing escalates.

Any applicant for Cyber cover now must demonstrate that they have strict internal checks such as:

  • Multi-factor authentication
  • Focused controls
  • Strong Risk Management culture

As with D&O we will be happy to help you navigate your course through this difficult market cycle and have had considerable success in sourcing coverage for clients who had heretofore been unable to access quotes.

M&A Insurance

Finally, some good news! The insurance market for specific M&A products such as Warranty and Indemnity and Tax Liability remains encouragingly strong. 

The last AIG claims summary for transactional liability pointed to a consistency of claim circumstance notifications at the circa 20% mark. This then allows a disciplined market relaxation. Positives to note are:

  • Upwards of 25 underwriters competing for market share
  • Pricing stability and a slow reductional curve

The biggest benefit to clients is a widening coverage suite that looks to support a more American coverage suite such as an indemnification basis of insurance.

W&I insurance can now provide coverage that goes beyond the parameters of the SPA and this must be viewed as a positive. Examples here include synthetically wider insurance cover giving greater comfort to the deal counterparties.

The continued strengthening of European underwriting hubs in locations such as Spain, Italy, Scandinavia and Poland allows deal flow to be underwritten appropriately without ignorance of local practices being a deal barrier.

Contact David Walters, Head of Financial Lines