How long softer D&O and cyber markets will last

For the third straight year, Canadian markets in directors and officers (D&O) liability and related lines will remain on the soft side thanks to ample capacity, says Aon’s Fall 2024 Canadian Insurance Market Update.

“While rates are expected to stabilize near term, we continue to see decreases on most primary and excess layer renewals in the D&O public and private space as new business opportunities continue to remain limited,” the report says.

Decreases will be more significant for newly listed companies that are moving away from their initial public offerings. What’s more, client stability has improved due to recalibration of portfolios during this past market cycle.

Significant capacity exists on both primary and excess layers because insurers are targeting growth, notes Aon, plus there are new market entrants.

“We continue to see flexibility in breadth of coverage by insurers which allows us to negotiate innovative and proprietary coverages to adequately address emerging risks,” says the report. “Some insurers are now also showing some flexibility around the exclusions and depending on the risks, agree to offer have in carvebacks to exclusions.”

But, competition notwithstanding, Aon says signals from insurers suggest softer markets may not persist.

“While current rates are expected to be adequate to address losses, further rate reductions could negatively impact insurers’ profitability as exposure is expected to increase,” says the report.

“Increased bankruptcy, financial instability, and regulatory and legislative changes are some of the exposures being closely monitored and could adversely influence renewal terms as the aforementioned conditions can all lead to an uptick in single plaintiff and class action litigation.”

Costs related to defending court cases are concerning, and Aon notes, “rate stability is therefore anticipated to ensure insurers books remain profitable.”

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Cyber liability

Maintaining strong corporate governance is important going forward, particularly in cyber and environmental areas due to enhanced regulatory and shareholder scrutiny, according to Aon’s report.

“Buyer friendly market conditions continue, characterized by healthy competition, abundant capacity, and incumbent insurers seeking to retain renewals and potentially expand their participation,” it notes. “As pricing continues to decrease for excess layers, more insureds are opting to purchase additional limits, using data and analytics to support their decisions.”

Going forward, insurers will focus on risk differentiation and pricing will reflect that.

“Retentions are stable but the ability to ‘buy down’ the retention is prevalent and, in many cases, the premium trade-off to elect a lower retention is very favourable,” says Aon. “Coverage remains consistent as most markets have adjusted their war exclusions and infrastructure exclusions (those areas were the major theme of change through 2021-23).”

Meanwhile, claims are becoming more frequent, and Aon’s report cautions current buyer-friendly markets may not last. It cites the CrowdStrike software outage on Jul. 14 as a reminder of the potential risks of global connectedness, despite the insurance impacts of that particular event being limited.

“As rates continue to decelerate and claims activity increases, the market may turn more volatile over the next three-to-five years than the current state,” says Aon.

Feature image by iStock/Aiman Dairabaeva