Armed with Answers
Clients are better informed about the risks that corporate directors and officers face these days, says D&O specialist Sarah Robson of Marsh Canada.
Robson is the managing director and national specialty practice leader with Marsh Canada Limited. In her experience, companies are substantially more sophisticated about D&O insurance than they have ever been before.
“Business leaders are far better educated about the exposures and therefore more demanding about understanding the solutions that we can bring to the table,” Robson says. “As a result, our role isn’t just transactional, i.e. placing the insurance. It has really taken on an increased emphasis on the advisory role as well.”
Corporate Canada’s C-suites are pushing for details. “They’ll ask questions about the structure of the program,” she says, explaining that clients want to know if they should add Side A coverage, providing direct coverage for directors and officers for acts that the company isn’t able to indemnify. They also want to know how business events impact the situation. What happens if someone takes a run at the company and it’s at risk of being taken over? What are the coverage implications if the business aims to restructure under the Companies’ Creditors Arrangements Act (CCAA)? Or worse, become insolvent or bankrupt?
All of these queries make the work more challenging—and more rewarding. But clients’ newfound sophistication also accompanies a host of market trends that could very well trip up brokers who aren’t able to adapt to the changing needs.
What caused clients to boost their D&O awareness levels? The media may be one catalyst. Reports about directors and officers as the targets of shareholder lawsuits and regulatory investigations have put a fine point on the importance of D&O.
“Certainly we’ve seen a marked increase in the number of securities class actions that have been filed under Bill 198 in Canada,” Robson says, referencing the law creating secondary market liability for companies and their officers and directors. “That’s been driven by several factors: weakened financial markets; greater focus on corporate disclosure. That only heightens the risks for companies and their directors and officers.”
The insurance industry has been working to raise awareness as well. Robson and Marsh colleague Alexandra Kindbom, for instance, created and teach a course at University of Toronto’s Rotman School of Management designed to bring participants up to speed on D&O.
“It allows us to enhance their knowledge and understanding of the D&O product, giving them the confidence to ask the right questions about coverage,” freeing them up to focus on being effective directors, says Robson.
Clients are often buying more D&O limits than they have in the past, partly because of the extended soft market. “There’s lots of competition,” Robson says. “Rates have been at their lowest for a long time. As companies achieve savings on their renewals, some are taking those savings and reinvesting them in additional limits.”
Clients are also better versed in the risks of operating in a global economy. Clients with operations abroad want to know about international risks. Is a local policy required for a specific country? Are there bribery laws to consider? What happens if the company cannot indemnify and the insurance cannot respond due to regulatory restrictions in the country?
“We’re seeing a lot more focus on the claims mechanics,” Robson says. “They want to understand their rights as the insured as well as those of the insurer. Who selects counsel? Who drives that strategy? What’s the timeline for defense costs to be paid?”
At the same time, Marsh is seeing an influx of privately-held companies interested in D&O. “While public securities exposures present the most severe type of D&O litigation—the securities claims—private companies are not immune,” Robson says. “You can have employee exposures, solvency concerns and business disputes that can all turn into tricky D&O issues. Business leaders are increasingly aware of that… We’re seeing that more private companies are carrying the insurance than we have in the past.”
It’s a good time for companies to purchase D&O insurance: the market continues to be soft, affording plenty of capacity and engendering plenty of competition among carriers, which are broadening their wordings to add value, rather than compete on price alone.
This is where D&O specialists really shine, Robson says. “One of the key roles we play in the evaluation of the quotations for our clients is to do a coverage comparison, very detailed so they can understand the differences. It isn’t always apples to apples between the different carriers.”
It takes an eagle eye to spot the differentiators. Insurers may have different definitions for “claim” and “loss” that can make one policy or another better (or worse) for a client. Some provide affirmative coverage for taxes, while others specifically exclude taxes. Are directors and officers protected if a principal shareholder files a suit? What is the extent of coverage for pre-claim inquiry costs? By carefully evaluating the wordings, brokers specializing in D&O can tailor the wording to suit the client’s needs.
The soft market may not last forever, however. Robson points to bifurcation in the marketplace: on one side, a number of insurers continue to provide plenty of capacity and record-low rates. On the other hand, some insurers say rates are bound to rise.
“There’s a sense now in the market among insurers that the market has bottomed out and continued rate reductions are no longer supportable. In the US for public companies, primary D&O carriers are putting upward pressure on rates; as a result, many insureds are receiving smaller decreases and in some case modest increases in their primary program at renewal.” In Canada, “one or two insurers are suggesting that they should start to see rate increases, particularly on their publicly-traded book of business.”
Still, the majority of insurers in this country—particularly those that are not currently paying claims out—continue to provide competitive quotations, Robson says.
That said, insurers have curtailed their appetites for certain kinds of risks. “We’re seeing underwriters tighten their appetites for certain foreign-owned companies in response to some well publicized public companies both here in Canada as well as in the US.” she says.
Sino-Forest is one of the high-profile cases. Last summer the Globe and Mail reported that the China-based forestry company’s shares collapsed in value following allegations that the company misreported its finances and recorded sales that never happened. A class-action lawsuit by Sino-Forest shareholders against the company and its top management and directors sought $7 billion in damages.
Robson says Marsh has developed a process designed to help clients differentiate between carriers. Broadly speaking, “the credit quality of the insurer is the starting point,” she says. “You want to make sure that the insurer is going to be there to pay the claim,” especially since claims usually aren’t settled for years after the initial action. “Do they have the wherewithal to be there for the long term?”
Also, is the carrier committed to D&O? Or is it using D&O to leverage other lines? Is it new to supporting certain kinds of clients? How experienced is the underwriting team? How accessible are they? “We want access to the decision maker, both in terms of making the underwriting decision as well as in the event of the claim,” Robson notes.
What’s more, “we look very hard at the claims experience we have with them. Have they actually paid claims? Do they have an in-house claims group, or do they outsource it entirely to a law firm? Is that law firm here in Canada, in the U.S., the U.K. or elsewhere?” Depending on the client’s situation, legal support beyond Canada’s borders may be just what’s needed—if the client operates globally, for instance.
Robson says Marsh has a number of client success stories, but the one she mentions when asked recalls a time when the market was anything but soft. In fact, back in 2002 and 2003, capacity was curtailed as insurers aimed to reduce their exposures in a much harder marketplace. Finding $200 million in limits for a set of clients proved to be increasingly difficult in the Canadian marketplace. So Robson and her team developed a pitch for the London marketplace, aiming to differentiate Canadian risks and thereby increasing the comfort level and appetite for underwriting businesses in Canada.
“We managed to get interest from a number of syndicates,” she says. “That allowed us to build those $200 million towers with some new capacity.”
It also opened the door to new capacity for the Canadian market. “As it sits today, there is several hundred million dollars worth of capacity available in the London marketplace for Canadian companies.”
Becoming an Expert
Judging from Robson’s career history, it takes time for a broker to master this area. She started as a trainee at Chubb Insurance Company of Canada right out of university; at Chubb, she learned the basics of D&O. After a couple of years she was lured over to Marsh, where she built on her executive risk background, trading D&O expertise for property and casualty advice from colleagues. Her time with Marsh saw her working for the company in the US, and when she returned to Canada, she returned to the underwriting side of the business to focus on broader global D&O risks at Liberty International. Eventually, however, Marsh called again, this time offering the chance to build the Canadian FINPRO (financial and professional) practice. She has been with the brokerage since then, including three years spent in New York.
Ask her about the skills a broker needs to succeed in D&O, and Robson will tell you it begins with technical acumen. Brokers need to understand indemnification provisions, liability statutes, corporate-governance standards, and they need to know how boards of directors function. Contract wording analysis, risk exposure research skills, and strong financial analysis capabilities are crucial, as is attention to detail.
Equally important is being a team player. “D&O is a complex subject and you’ll be a better broker if you bring the strength of the team’s knowledge to the benefit of your client,” Robson says.
“Well-developed presentation and facilitation skills” are also key, she says. Sometimes clients need help to identify the real issue.
“A broker capable of facilitating a dialogue with the client to define the problem and design the solution has an advantage when interacting with the C-Suite,” Robson says. “It really helps build that trust factor and allows you to be seen as a trusted advisor to that company. And that’s really what we’re trying to do in every single interaction.”
Advice for young brokers
“Read as much as you can and be informed about global issues, and how they affect our Canadian companies. The ability to think broadly about risk and the issues it presents to companies will help you serve your clients most effectively.”
Copyright 2012 Rogers Publishing Ltd. This article first appeared in the May 2012 edition of Canadian Insurance Top Broker magazine.