Swiss Re report questions insurability of D&O

A recent Swiss Re report includes an analysis about the long-term viability of D&O insurance in the United States.The report, “Innovating to insure the uninsurable,” gives a general overview of the limits of insurability and uses practical examples to demonstrate how insurers innovate to overcome obstacles to covering new and evolving risks. One section of the report asks the question: “Will Directors and Officers liability remain insurable in the US?”Ultimately, the report concludes, “D&O insurance remains a vital part of the US corporate governance system and is therefore likely to remain available. Since few prospective directors or officers would agree to serve on a board without ample D&O liability coverage, strong demand for the coverage persists.”New insurers have brought fresh capital to the industry, causing premiums to stabilize despite rising claims settlement expenses.”But several factors make US D&O liability a “challenge to insure,” the report notes.First, there is a “moral hazard” problem. In other words, some directors and officers may change their behaviors knowing they are covered by insurance. For example, the report says, “covering punitive damages with an insurance contract arguably weakens [the] incentive [of directors and officers] to comply with laws and regulations.”Second, even where coverage for fraud is explicitly excluded from a D&O contract, the exclusions require a “final adjudication.” This opens the door for an insured’s settlement to thwart the exclusions, which, in turn, makes it difficult to price the coverage properly, the report notes.Thirdly, loss occurrences happen in waves, often triggered by bond defaults, sharp stock price declines, or changes in public sympathy. This means a high number of claims may be paid out at any given time and the claims will be expensive due to the rising costs of the US tort system. This leads to “major uncertainty with respect to the insurer’s exposure,” the report says.