As we all continue to be challenged by the most volatile and restrictive Directors’ & Officers’ Liability (D&O) insurance market in the history of the segment, we are increasingly asked three key questions by larger, typically ASX-listed, organisations:
- What premium relief would we receive for not buying Side C?
- What are the coverage implications if no Side C?
- How can a Captive or Protected Cell Captive (PCC) play a role?
As an aid to our clients, we have provided the following general responses to each question below.
1. What premium relief do we receive for not buying Side C?
For reference, Side C insures the company itself for its own liability and, in the public company context, is usually limited to securities claims.
Importantly, this question needs to be approached in the context of the rapidly changing insurance market. For example, let’s say that an organisation’s expiring D&O premium is $2m per annum and that this program incorporates traditional Sides A, B and C.
In the current market, which is undertaking expansive price correction to remediate years of insured losses, it is not unusual for that same form of cover to be priced at a 200% increase or, $6m annual premium together with additional deductibles in this year’s market. These increases are extremely confronting and, understandably, will most likely lead to serious interrogation at Executive and Board level with the request for meaningful options.
In a typical coverage negotiation, from this indicative premium of $6m, an option without Side C might lead to a discount up to 40% or a premium of $3.6m for Side A and B only. Or a premium increase from $2m to $3.6m with removal of Side C.
Further adjustments to pricing can be achieved through higher deductibles and compressed limits, however, the relative trade-off for these compromises may not prove to be compelling in the current market, bringing the conversation back to the implications of the potential removal of Side C.
2. What are the coverage implications of no Side C?
Apart from directly exposing the organisation to these liabilities, the absence of Side C potentially presents a number of issues such as:
- Less seamless policy response to a notification or incident
- Protracted interpretation of coverage response
- Less certainty for Directors and Officers
However, in this challenging market with the associated cost implications, it is not unreasonable to question the longer-term sustainability of Side C and the virtues of a Side A and B only program which include:
- Less premium cost to the organisation
- Preservation of the coverage limit purely for Side A and B claims only, i.e. the original purpose of D&O insurance before Side C was conceived
3. How can a Captive or Protected Cell Captive (PCC) play a role?
In circumstances where an organisation would prefer to maintain Side A, B and C coverage, however price is becoming untenable, an alternative option involves the utilisation of a Captive or Protected Cell Captive (PCC).
Under this approach, the organisation can maintain both the breadth of cover and the seamless policy response through a structured vehicle to either self-insure or co-insure Side C, whilst saving premium that would otherwise go to the market. The Side C exposure is then either fully secured through a parent guarantee or letter of credit. Alternatively, a portion of the Side C risk can be co-insured or reinsured with traditional insurers at a proportional cost.
For Directors, this approach provides comfort and confidence on both the scope of cover and policy response, together with continuity of coverage form.
For the organisation, this maintains the coverage posture for Directors whilst providing direct premium savings, albeit with commensurate additional retained risk.
This is a relatively straightforward option to explore through an existing Captive. We suggest no less than 30 days’ notice.
For organisations that do not have an existing Captive, the PCC option requires up to $100k in additional annual cost and no less than 45 days to implement.
Furthermore, the PCC option can be expanded to provide Side A and B coverage through the introduction of a Trustee structure. This approach is less common, but is increasingly being explored by large organisations with extreme premium challenges.
More information is provided in a PDF here.
Whilst the above responses intend to provide guidance on the market and insights on emerging options, as always, please see your Marsh representative or contact us here for more specific advice and costed-options based on your specific circumstances and preferences.
