As insurance brokers, we deal with hundreds of management liability policies across a range of large and small businesses. But there’s now a common denominator in this type of cover: to put it lightly, the insurance market is in a bit of a mess.
COVID-19 is a significant factor, but it isn’t wholly responsible. So, what is the reason for the current state of the management liability market? Here, we identify a number of key issues that contributed to the present situation.
Premiums were too low
Despite being around for a while, Directors’ & Officers’ (D&O) liability is still a relatively modern type of insurance. And, as with any new type of cover, the data on what premium and terms are needed to insure the risks is rarely accurate early on. In fact, it usually takes decades to become reliable.
Latent exposure has caused particular problems for such policies, with many claims taking six to eight years to resolve.
What’s more, we’ve seen a period of increased competition, where insurers believed management liability to be a highly profitable area. They fought for a share of the market, only to discover that these premiums had been driven down to an unsustainable level, just as the rise in claims costs kicked in.
Claims costs increased
Payouts have increased consistently over the last few years – partly due to a higher number of claims, but also from spiralling costs.
Society as a whole is now more aware of its rights and therefore more willing to act against directors, boards, and their companies. Increased class actions, tougher regulatory stances, and emerging areas (such as actions relating to the ‘Me Too’ movement, lack of board diversity and wrongful environmental practices) all result in additional claims.
They’ve become more expensive too – from smaller claims where increased legal fees are incurred to large disputes costing many millions.
The economy suffered
Certain sectors like retail, construction and hospitality were operating in a tough landscape even before the pandemic, but COVID-19 accentuated the problem. Now that government support is being withdrawn, it could cause even more distress for industries across the board.
Brexit only added to these economic issues. And the whole situation has left insurers in an uncertain position, with many refusing to insure anything but the very cleanest of risks.
Administrative issues arose
Insurers can quote risks reduced. But whether it’s Brexit-induced regulatory restrictions, withdrawal of capacity from reinsurers, or a reaction to deteriorating results, the market’s ability to service these risks has dropped. This is likely due to the fact that insurers, particularly underwriters, are massively overworked.
Couple that with people seeking alternative quotes in light of premium rises, as well as flawed automated systems and additional challenges caused by the pandemic (such as remote working, home schooling and mental stress), and it’s clear that now is a very tough time for underwriters.
This all results in slower quotes and less time to consider the details of challenging cases, leaving some SMEs unable to get any management liability cover at all.
Guidance from RiskBox
Unfortunately, we’re not in the clear yet. In fact, we’re only at the tip of the iceberg as the insurance industry is having to juggle many factors, including management liability. Cover is harder to find, terms are more restrictive, and premiums will continue to rise – at least in the short term.
That’s why we recommend starting your management liability renewal process early. Be prepared to provide much more information than you would have done previously, and remember to budget for increased premium costs.
Need a hand finding the right cover? Speak to the team at RiskBox. You can reach us on 0161 533 0411 or by filling in our online contact form.
Agencies - September 25, 2023
Blog - September 11, 2023