The rise of the Directors & Officers insurance market in Ireland and challenges for the future

When I joined the Irish insurance market in 1997 from the UK, Directors and Officers insurance (D&O) was virtually unknown. It was also complicated as no one was certain that the cover was legal.

At that time, Section 200 of the 1963 Irish Companies Act stated that no company could indemnify a director as indemnification for “any negligence, default, breach of duty or breach of trust, which he/she may be guilty of in relation to the company” would be declared void. This meant all claims were side A cover (reimbursement to the individual) at commencement of the claim until innocence was proven when reimbursement by the company was allowed (side B – company reimbursement).
The 2014 Irish Companies Act retains similar clauses but clarifies that D&O cover can be purchased by the company. This feature of the Act, whereby the company cannot indemnify the director but can purchase D&O cover on their behalf, emphasises the personal nature of the cover where the prime purpose is to protect the individual. In the event of a claim, it is the individual director who must arrange and fund their defence against the increased scrutiny of regulators, shareholders, activists and possibly even their employer, jeopardising the director’s personal assets.

Unlike other insurances, directors can claim directly under the policy without the policyholder’s consent – making this insurance quite a unique product. It is therefore essential that the cover is placed correctly at inception.

Current market challenges

In contrast to when demand for the product was low, we continue to see clients purchase higher limits or seeking replacement capacity where the incumbent insurer retrenched from the market following a lengthy period of increased capacity, unsustainable pricing, and broader cover.

Like most insurance products, the last time the market saw such a “correction” or reaction to events was after 9/11 in 2001. The losses sustained by insurers at that time depleted reserves and the fear of future losses caused an instant hardening of the market. However, over time competition and in later years, new capacity resulted in the following: –

• Falling rates until 2016, with rates dropping as low as 20% of the 2002 levels achieved*
• Gradual corrections increased rates, but by 2019, they only reached 40% of 2002 levels*
• From 2020, the hard market really started to bite so rates returned to 2002 levels and 2021 finally saw rates exceed the 2002 levels*

During this period, heightened regulation and greater corporate governance saw just about every type of claim increasing, but the market did not keep up as it continued to provide wide policy terms even when impacted by falling interest rates.

In 2020, the pandemic hit and many industries closed their offices and worked from home. The impact was immediate with the global economy stalling and major sectors of the economy, such as tourism, hospitality, and aviation facing ruin. Global supply chains were disrupted, inflation increased and, just as the world was starting to recover early this year, Russia invaded Ukraine.

The direct fall-out from Covid-19 has not yet fully materialised in the D&O market, but the level of insolvencies rocketed in the UK after a similar withdrawal of government support. However, we are now starting to see the impact following the withdrawal of government support here.

The economic outlook remains volatile and uncertain with many organisations and company directors struggling to employ suitable staff. An obvious recent example of the challenge in restarting operations was at Dublin Airport.

Many businesses across multiple industries are facing supply chain inflation, higher energy, and labour costs, and a continuation of supply chain interruption. The cost increases will influence how businesses survive and, more importantly, the share price performance and insolvency numbers. Most of these factors would be outside of a company directors’ control but as D&O claims have become event-driven, we can see the risk that directors could potentially face claims for lack of planning or inadequate response to events, thus failing in their duty to shareholders.

Environmental Social & Governance (ESG) matters are still an emerging area for claims. The environmental aspect probably has the most publicity and attention from activists, but the Social and Governance elements remain areas of concern, with activist campaigns rightly judging companies by their actions and holding boards to account.

Climate change has always been an area of potential for claims and not just for fossil fuel companies. I recall attending an insurance lecture in the early 1990’s which set out how global warming is not just warmer weather but would lead to a changing pattern of weather-related disasters. As insurers would end up paying the claims, they should be promoting and investing in more environmental practices. Unfortunately, no man (yes, all men) seemed to worry about this hypothetical event, but they are taking notice now with investors looking at companies and their directors’ green initiatives.

Another sector of D&O claims that may increase is investigations and regulatory actions. The last decade has seen more personal responsibility included in legislation and more powers for the regulators to call companies to account and explain their actions including the pending Senior Executive Accountability Regime – initially aimed at financial institutions.

The Future and Aviva

The market is starting to see a limited number of new entrants coming into the market creating more competition for small to mid-market risks – mainly on excess layer programmes which is good for the customer. However, larger corporate risks still face capacity issues.

Since Aviva entered the financial lines market 18 months ago, our objective has been to provide much-needed capacity for customers.
Aviva recognises the challenges that businesses continue to face and the solutions we have provided to date have received great support from our key broking partners.

Our initial offering was excess of loss D&O capacity. We then introduced a Management Liability policy that includes D&O, Employment Practices Liability and Corporate Legal Liability in Q4 2021. Jordan Lacey joined the ML/D&O team in January 2022, and we introduced a Commercial Crime offering in April 2022.

Our plans for the immediate future are to introduce a further suite of products for Financial Institutions in Q4 of this year, whilst we continue to develop a cyber offering. In the medium term we are looking to go live with a digital solution that will enable us to expand our D&O /MLC appetite in the SME market providing greater support for our broking partners and their customers.
We have market leading products, many of the most experienced underwriters in the market and we are open for your business. Please give me or any of the team a call.

Source: *Marsh UK Directors and Officers liability insurance 2021 pricing index