|
Market Update
|
International - Financial Risks
Printable Version
|
With the recent corporate scandals and the current global financial crisis, many
corporations are entering uncharted waters. Couple this with the responsibilities
mounting for both executive and non executive directors and officers of
corporations, there has never been a time when financial lines insurance—namely
Directors and Officers Liability, Professional liability, Pension Trustees Liability,
Employment Practices Liability, and related insurances—have become such critical
policies for the corporation to have. These are needed to provide protection to
their most valuable assets—those who lead the corporation.
Putting aside the current global financial issues, the regulatory environment
that companies now operate within has continued to present ever-increasing
challenges for the management team. Not only are there regulators in the home
country but, with corporations expanding their footprint across the globe, there
are regulators to deal with in each of those different jurisdictions. Further, there
are the varied groups or bodies that have a close eye on the management team,
namely employees, shareholders, regulators, competitors, and environmental
groups, to name a few. The legal environment is becoming increasingly hostile
as the plaintiff bar looks for opportunity, and management is held ever-more
accountable for their actions or lack of action. Consequently, corporations have
to comply with a more aggressive regulation environment than ever before.
In light of the above, what is the current market reaction? The market has
become clearly divided between those corporations involved in the financial
markets, and those that are not. There are again subdivisions within each, which I will highlight below.
Financial Markets
At present, the market continues to be very cautious of those corporations involved in the financial markets sector. There is some
appetite to underwrite the financial exposures currently sending convulsions through the banking sector; however, insurers are
proceeding cautiously. Prices are rising significantly in the areas of most concern, namely the banking sector, but no product has
been withdrawn. On the plus side, products are still available; however, many have concluded that it is uneconomic to buy and
cannot obtain the limit of indemnity they desire.
However, well-presented risks in this area are being considered and underwritten responsibly. Detailed, in-depth underwriting
guidelines have been imposed upon the underwriters, and if a client can demonstrate risk controls and satisfy underwriters’
requirements, favorable terms can be achieved.
The fundamental underwriting benchmark is robust reporting and quality of accounts. If clients can demonstrate that, then the
markets are willing to come to the table. That being said, there are also markets that are willing to look at the more-distressed
accounts but will impose more-restrictive coverage terms. As with any marketplace, there are always those who are willing to be
opportunistic and prepared to offer terms for the trade-off of a hefty premium. The entrepreneurial spirit of the market is still
very much alive and kicking; it is whether or not the client is prepared to pay the price!
The investment banks, private equity, and hedge funds are also severely challenged across their financial portfolios; however, again
if those institutions that can demonstrate a commitment to quality portfolios and stability across their capital investments, they will
be looked upon favorably.
Despite the reputations that financial instruments have been appropriated as complex weapons of mass financial destruction, there
are those whose investment portfolios have out-performed due to their conservative nature. Equally, private equity firms will also
receive favorable terms from insurers as long as they have made a conscious effort to select quality investment options.
Commercial
The commercial D&O sector is seeing a very different market position. There is over-capacity and carriers are looking to gain
market share. There is greater underwriting based on the financials of accounts, and those with a leveraged position will be asked to
expand on their ability to service that debt. However, the market continues to offer highly competitive terms, and they are looking
for opportunities.
With insurers looking to understand the quality of a company’s debt and precisely how much leverage there is on the balance sheet,
there are certain industry sectors that are seeing greater scrutiny. Therefore, those companies that are adequately prepared when
discussing their renewal with carriers will fare better. Similar to the financial sector, if a firm can demonstrate that it is not too
highly leveraged and that it has put in place solid financial controls, insurers will look favorably upon these exposures.
Looking to 2010, it is impossible to forecast with 100 percent accuracy, but we can expect more of the same. All the signs right
now are that the market is stable and that there is no immediate prospect of a general hardening in the market.
|
Please contact your Lockton Representative for further information regarding any information contained in this
market update.
|
|
|
|
