Has your Pharma D&O premium gone up recently? Here's why...
Purchasing D&O cover, also known as ‘Directors’ and Officers’ insurance, has long been a standard procedure to protect senior management in the event of litigation and costs. Many firms would routinely buy D&O, renew and forget about it – understandable given the myriad of other challenges to contend with. But since the start of the year, the D&O landscape has changed significantly. With premium hikes over the last six months and capacity tightening, securing D&O is now becoming difficult.
What happened to D&O?
Whilst the D&O insurance market as a whole has seen a general reduction in capacity and an increase in premium rates during the course of 2018, these changes have been magnified in relation to pharmaceutical companies, driven primarily by the adverse claims experience of insurers participating in this business sector. For example, nearly 20% of all security filings in 2017 were against companies in the field of life sciences, and an overall increase in class actions combined with a rise in the cost of those claims has served to weaken the appetite of insurers to write this class of business.
Where even a successful motion to dismiss can cost upwards of USD 1 million, it is perhaps understandable that insurers are looking to raise both premiums and deductibles in an effort to stabilise their underwriting portfolios. Additionally, specific targeting of the life sciences sector by the plaintiff’s bar and the prevailing tendency to launch a claim as soon as there is a dip in a company’s stock price are fuelling a growth in the deterioration curve of insured losses.
In the US market, the drive to pursue M&A related D&O claims in Federal courts and the escalation in derivative actions has heightened insurers’ exposure to losses in a territory where there is a growing number of law suits (more than 20 at time of writing) being brought against companies by state attorneys in response to the widespread opioid addiction crisis. Directors of pharmaceutical companies that have cross-border operations face significant risks under the Foreign Corrupt Practices Act (FCPA), being a consistent target for investigations by regulators.
The impact of hardening D&O market in London
The factors outlined above have sharpened the general rise in D&O premium rates for pharmaceutical companies, increased the deductible levels being required by those D&O insurers still willing to underwrite this class of business, and severely lessened market appetite for primary layer participation. Where deductibles of US$1million used to be common, we are now seeing the same placements attracting deductible levels of US$5million to US$25million, although of course for non-indemnifiable loss incurred by directors the policies still pay “ground up” (i.e. no deducible applies). Even with the increases in premiums, some insurers such as QBE and Axis have retreated from primary layers to seek refuge in the higher, less exposed, excess layers.
Following a prolonged period of a “soft market”, the broker’s job in finding the best deal for their client has rapidly become much harder. From a buyer’s perspective it has perhaps never been so important to engage with the right broker – one that has the experience, the innovation, the tenacity, the market relationships and the market power to get the right deal done. The nature of the pharmaceutical business means that the stakes have always been high for companies and their investors. With the current environment of litigation against directors, the stakes have become high on a personal level too.
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