Don’t run the risk: get covered

These trying times are filled with multiple risks. What should companies look out for when getting covered?

Clarissa Rizzo, business unit manager of professional risks at Aon South Africa, summarises it perfectly: “Without insurance, very little progress takes place. No investments can be made, no loans can be acquired. At the heart of almost every financial or economic decision is an insurance policy of some sort.” 

But without risk, which is abundant during these difficult times, there would be no need for insurance. 

In its 2020 Risk Maps Report – which examines political risk, terrorism and political violence globally – Aon finds that three in five developed economies face the potential of strikes, riots and civil unrest this year. And it seems the Covid-19 pandemic is deepening these concerns. 

Countries that rely heavily on tourism or retail, or where there is a higher human toll from the pandemic, are facing a greater potential for civil unrest and government-focused protest – a risk that was already elevated prior to the pandemic. 

Alicia Goosen, chief broking officer at Aon South Africa, says there is also an increased risk of civil unrest because of the government’s ongoing lockdown provisions. “It is crucial for risk managers and business leaders to review their insurance programmes and interrogate their cover provided by the South African Special Risk Insurance Association (SASRIA) against the risk of loss or damage caused by protests, riots, strikes, civil commotion and public disorder.” 

She adds that clients also have to heed the rand’s trading volatility, ensuring that they review their sums insured regularly to accurately reflect the shift in the currency’s exchange rate against the major currencies. 

“The placement of assets policies is done on the basis of new replacement values to avoid averages being applied to a claim; but in light of a volatile exchange rate, clients may find their current insurance cover is woefully under-geared to match the volatility.” 

An alternative approach that could be explored by clients and their insurers is to provide for a fixed exchange rate for the insurance renewal period, thus avoiding the application of average if there is a huge shift during the period. 

But riots and the rand’s volatility aren’t the only factors to be considered. Increased pricing, reduced reinsurance capacity and restrictions in the scope of cover have also created significant challenges in the global directors and officers (D&O) liability market, and South Africa is no exception. 

“Because of inadequate ratings, combined with larger, almost ‘catastrophe-like’ settlements in a deteriorating claims environment, insurers have been feeling the pressure at both ends of the business,” explains Angela Jack, business unit head of the financial services group at Aon South Africa. 

“The inevitable consequence is a move by insurers to price risk differently to allow for the increased frequency and size of their D&O related losses – losses not previously contemplated in their rating models. It’s one reason why we have seen a hike in pricing – by as much as 50% or more in some instances and lines – as well as restrictions in cover. Some markets are even withdrawing from certain industry sectors as appetites wane.” 

She adds that Covid-19 brings an additional burden into an already distressed class of insurance. “Following a number of coronavirus-related securities class actions, the question of the applicability and availability of D&O liability cover for claims related to Covid-19 is top of mind. We anticipate more D&O claims against companies relating to failure of the fiduciary duty of care, inadequate or inaccurate representations about the impact of Covid-19 on the business and its stakeholders, insolvencies and allegations of anti-competitive behaviour.  We have already seen increased underwriting scrutiny in the wake of Covid-19 and future pandemic risk, with insurers requiring detailed information relative to business continuity, impact and response plans.” 

In terms of claims, insolvency-related claims and regulatory enquiries feature strongly, with a significant rise in the severity of defence cost claims. “Inter-company and state-brought litigation have impacted on the scope of D&O cover being offered, with event-specific exclusions being brought into the wordings,” explains Jack. 

“The most significant claims impact is the rise of audit failure and inadequate or incorrect financial reporting, with several full policy limit losses anticipated.  Companies with multiple listings are especially exposed to the potential for multiple shareholder actions, with choice of jurisdiction becoming a matter of importance.” 

The top three D&O trends include:

• Increased pricing pressure;

• A need for alternate capacity to be sourced; and

• High level information that should be provided to the insurance markets, with tripartite client, broker and insurer engagement being essential to ensure continuity of cover within existing structures. 

“With the current hard market considered to be more of an overdue correction, it is anticipated that rates will continue to increase, and capacity will reduce over the next six to 12 months with a stabilising period thereafter,” says Jack. “Without a significant new influx in capacity in the next period, the new pricing levels would look to become the new norm.” 

She believes that sound preparation and a high quality of market submissions will be essential. “That means making sure that submissions include everything that underwriters might require to understand and correctly price the business; including financials, a business plan and/or strategy with areas of particular focus being expanded into new territories; and how the business is addressing issues around the environment, diversity and inclusion, as well as cyber.” 

Engagement with insurers need to be timeous and transparent, with representation at C-Suite level being essential to the continuity of complex multinational programmes. 

But D&O liability cover isn’t only a risk mitigation measure; it also plays an important role for companies looking to attract and retain the best management team in an environment where heightened and increased oversight is a fact of corporate life, “with a new and emerging focus on areas around the environment, reputation, sexual harassment, discrimination and cybersecurity,” she notes. 

“Every D&O buyer should expect to work much harder – with their broker – to get cover while minimising rate increases as best they can and holding on to acceptable limits. This is where the value of having an expert insurance broker by your side comes to the fore.”