Multi-year policies have historically been problematic in the Directors and Officers (D&O) insurance market. Multi-year D&O policies are generally written on either a two-year, and to a lesser extent, a three-year policy term. The multi-year D&O policy is based on a “guaranteed premium” threshold that is endorsed onto a policy versus a “guaranteed rate” metric that is typically used in primary general liability policies.Typically, the policies can either be structured with one single shared aggregate limit of liability that covers the entire policy period, or there can be an aggregate limit of liability for the policy that can be reinstated annually over the course of the policy. The premium for the policies can be either pre-paid or collected on some form of an installment basis.There are several forms of multi-year D&O policies that exist in the marketplace today, including run-off, transactional liability, and wind-down polices, etc. For the purposes of this blog post, we are referring to a traditional multi-year D&O policy versus policies issued for specific business situations or regulatory requirements.During the 1990’s, the re/insurance D&O industry on the whole started to support the use of multi-year policies across their entire portfolios. These portfolios included small not-for-profit (NFP) organizations, private entities as well as large global public companies. At the time, the D&O market was in a soft market cycle, plagued by over capacity and reduced rate levels. The introduction of multi-year policies into this market environment exposed several additional drags on the profitability of the segment, such as:
The increase in the number of D&O markets in the late 1990’s created a classic oversupply of capacity. Coupled with several other macroeconomic factors, it created a “perfect storm” that resulted in extremely unprofitable results for the D&O re/insurance industry. The presence of multi-year policies in the D&O market at the same time reduced insurers’ ability to adjust pricing/terms to combat the increase in losses, leading to a prolonged period of negative results.Against this historical background, there are several important considerations to be made when determining whether to utilize a multi-year D&O policy:
The D&O industry today has taken a more selective approach to writing multi-year policies, preferring to write multi-year policies on an individual risk basis versus an overall portfolio basis. Current market feedback suggests that carriers and brokers alike have focused the use of multi-year policies on lower hazard classes and risks with small, consistent exposure bases. Only time will tell if the continued issuance of multi-year D&O policies contributes to a downturn in the profitability of the segment as was the case in the late 1990’s, or if the lessons of the past have been co-opted into current practices, leading to an increased level of stability in the D&O market.
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