Why D&O brokers are looking at risk mitigation

Amid signs the recently easing directors and officers (D&O) coverage segment may gradually become a bit tougher, brokers and insurers will be taking a closer look at companies’ risk-mitigation procedures.

When writing risks, Catherine Lanctot, senior vice president and national leader of the financial services group at Aon, noted the ideal process includes speaking directly with members of the C-suite, either for an underwriting meeting or to craft an airtight submission.

“People [may] have the misconception underwriting meetings [are only required] in a hard market situation, or in a transition of the market,” she told Canadian Underwriter.

“There’s also benefits with proper coaching: making sure that you get the questions well in advance, making sure that you prepare the person who will be speaking on behalf of the company to make sure that they’re [addressing] key exposures.”

And, although every client’s different, insurers will nevertheless finely cut any data clients provide on corporate governance, their boards and ownership structures, said Dane Hambrook, head of specialty products at Zurich.

Insurers want to see controls are in place from an employee retention and management perspective.

“It’s about understanding the financial condition of a company,” he added. “We can achieve that through review of financial statements, but those statements are typically aged…because they’re audited. How much certainty…can you put on financials that were submitted in December 2021, which might have been a much different environment macroeconomically?

“[We need] to have a transparent conversation, understand [what] insureds are doing to penetrate and mitigate any hardships, whether it’s interest rate costs, whether it’s ongoing virtualization or a remote nature of the workforce.”

Conversations with the C-suite can address insurers’ and brokers’ challenges, since insurance applications typically don’t request specifics about whether a company has a diversity, equity and inclusion (DEI) committee, spells out its environmental, social and governance (ESG) practices or carries cyber coverage, said Michael O’Connor, assistant vice president of tech/cyber and professional lines at Sovereign Insurance.

Board composition also gets a close look to make sure there’s diversity of thought, particularly for medium- and larger-sized private companies. “We want…outside voices at the table; that it’s not just one or two people controlling the organization,” he said.

Current economic realities also heighten the importance of talking directly with management and the board, noted Hambrook.

“You can look at a balance sheet and see a shrinking margin,” he said. “But you need to understand why, or whether it’s short term in nature, and understand inventory trends. It’s vital to have those conversations about what is ultimately driving that [financial result].”

That’s particularly true since many private companies are less open about their future financials.

“There aren’t a lot of forward-looking statements. It’s about trying to identify if there are pressures from a financial standpoint as it relates to debt-servicing,” said O’Connor.

“We want to see if our clients are using their revolving credit lines and if it’s tied to the prime plus [interest rate].

“Prime has gone up so substantially over the last 18 months that if you’re dipping into your revolving credit to pay for supply side, but your interest rate was at four and a half [per cent] and now it’s eight and a half, it’s a significant impact on your financial health.”

This story is excerpted from one appearing in the April 2023 edition of Canadian Underwriter. Feature image by iStock.com/wenjin chen