Will recession hit brokers with a new D&O hard market?

Just when pandemic chaos was starting to ease, the light that Canada’s commercial insurance brokers saw at the end of the tunnel is starting to look like an onrushing train named the Recession Special.

With recent lifting of COVID-19 public health restrictions, many insurance experts predicted an economic recovery would lead some of the hardest-hit specialty commercial lines to soften — particularly directors and officers (D&O), professional liability, long-term care, real estate, cyber and travel.

But that optimism’s been replaced by clients’ struggling with supply chain disruptions, wage increases and labour shortages that are sparking the highest inflation rates Canada’s seen in decades. And economists at Canadian banks now predict interest-rate hikes aimed at curbing inflation will cause at least a short-term economic downturn next year – with some saying it could come sooner.

“There’s a concern about the impact of a global recession,” said Mona Krolak, senior vice president of HUB International HKMB Ltd. “We’re going out of the frying pan and into the fire, in a way. Yeah, we’re coming out of the pandemic, but all the knock-on effects going forward are going to lead to a global recession, which is just as bad.”

A slow-down in economic growth means companies generally will experience cash-flow issues, with some buyers unable to pay bills on time — or at all.

For smaller companies, that raises the possibility of bankruptcies. For larger, publicly traded firms delivering poor returns can lead shareholders to vent their frustrations by suing boards of directors.

Which means, brokers and underwriters expect a looming recession to play out in D&O and professional liability lines, in particular.

Some insurance underwriters are preparing by carving out coverage exclusions for bankruptcies in their D&O policies, said Chris Mutcheson, partner and national leader of brokerage Purves Redmond Ltd.’s FINEX-Financial & Executive specialty products unit.

“It’s a double-edged sword in this scenario. The fundamentals to remove a bankruptcy exclusion are present right now, because companies have come through COVID,” he said. “But at the same time, there’s a lot of pressure on underwriters not to remove a bankruptcy exclusion in the face of a pending recession.

“So, it’s a really tough push-pull scenario we’re in right now.”

Marc Major, industry and specialty placement leader at Marsh Canada who specializes in D&O for publicly traded Fortune 500 companies, said he’s not seeing an increased use of bankruptcy exclusions so much as tougher market conditions in the runoff space.

“Whether it’s due to bankruptcy or due to acquisition, we’re seeing tougher runoff conditions and the pricing for that has gone up,” Major said. “Pre-qualification for it has been eliminated; [underwriters] need to actually review it on the spot. So, it’s not a guarantee. We have seen that.

“We’ve also seen some acquisition conditions. That is, there would likely have been a bankruptcy had there not been an acquirer, and they were able to negotiate enhanced runoff conditions. So, I think it really depends on who the acquirer is and what their consideration is.”

Meanwhile, recent data showed commercial lines premium renewal rates continue to rise. On average, rates across all commercial lines increased by 8.95% in 2022 Q2, compared to a 9.12% average increase in 2021 Q2, said recent findings by Applied Systems.

“While premium renewal rates are lower than this time last year, we are seeing a steady increase in rates since the start of the year,” said Steve Whitelaw, senior vice president and general manager of Applied Systems in Canada.

“Our index supports the anecdotal evidence that we are indeed in a hard market. As we make our way into the second half of 2022, our quarterly index will show if the market continues this trend.”

 

This article is excerpted from one that appeared in the August-September issue of Canadian Underwriter and includes files from Alyssa DiSabatino. Feature image by iStock.com/Magnilion