Directors and Officers (D&O) insurance helps protect nonprofits from severe damage to their reputations and personal finances. This coverage used to be considered relatively inexpensive with easy underwriting requirements. However, after years of gradual changes, the market is hardening, leading to increased premiums, reduced capacity and restricted D&O coverage for nonprofits.
Nonprofits now face tough choices regarding their insurance. The pandemic presented several obstacles over the last few years, making it harder to raise funds for their causes. In some instances, underwriters may be hesitant to develop D&O policies for nonprofits if they are not in strong financial standing, making it even more difficult for them to be covered.
While it is important to budget wisely, cutbacks should never leave a nonprofit feeling unprotected in a legal or financial disaster. Organizations need to understand what to expect in this hardening market and prepare effectively without sacrificing important coverage.
Factors Contributing to the Hard Market and Restricted D&O Coverage
A number of different factors are impacting insurance pricing, but the following are common contributors to the hardening market and restricted D&O coverage options:
- Increase of claims occurrence/cost – Claims are increasing in both frequency and severity year over year, and attorneys are more inclined to take claims to trial (which could also result in increased settlement values). This extends litigation and significantly raises the cost to defend a claim.
- COVID-19 – Many workplaces have adapted to new operational adjustments, which can lead to new, unanticipated risks. Additionally, the Board of Directors could damage their reputation if they respond to the pandemic in a way that does not have their employees’ needs and best interests in mind. These complex challenges could result in nonprofits paying more for their D&O policies.
- Underwriting standards – Insurers are struggling to overcome underwriting losses, especially given how low interest rates have remained in recent times. This has made carriers more cautious, and many are restricting the classes of agencies and lines of insurance they are willing to underwrite.
- Investment returns – Nearly every insurance carrier uses the funds it receives from premiums to invest in other markets. However, reduced interest rates have negatively impacted profitability, and carriers have reduced their appetite for risk as a result.
Don’t Overlook the Importance of D&O Coverage
Even when acting in good faith, directors and officers of nonprofits expose themselves to risks with each decision they make on behalf of their organization. In the event of a claim, nonprofit leaders could suffer severe damage to their reputation and personal finances simply based on their decisions.
D&O insurance for nonprofit leaders is crucial and can provide the following benefits:
- Legal cost reimbursement
- Peace of mind
- Entity coverage
- Flexible limits
- Protection beyond indemnification
How Can Nonprofits Navigate This Hard Market?
Put simply, during a hard market, insurance buyers may face difficult decisions regarding their insurance coverage. Thankfully, however, agencies are not without recourse in the face of a hard market. The following are some strategies to help navigate shifts in the market:
- Review your insurance program. Above all, check that your policies account for your agency’s greatest exposures. Understanding your coverage ensures you’re not overlooking any exclusions and will help you secure the right policy for your operations. During a hardening market, it may be necessary to make adjustments to your policies. However, those adjustments shouldn’t come at the expense of the coverage you need.
- Bolster your risk management efforts where possible. Doing so makes your agency more attractive to insurers. Your broker can also help you review existing policies and procedures and make suggestions on ways to secure favorable quotes.
- Budget sensibly and plan ahead. In some cases, premium increases are unavoidable, and organizations should be prepared. Agencies should budget accordingly and take insurance costs into account alongside their other normal expenses.
- Work with the right insurance broker. During a hard insurance market, it’s vital to have a competent insurance professional advising your agenci. Be sure to partner with a broker that has strong carrier relationships and knowledge of your industry.
- Communicate with your broker early and often to determine how the hard market will affect your agency. Starting the renewal process early can give your broker more time to secure the best coverage for your agency.
Do not let the restricted D&O coverage options intimidate you. Agency owners who proactively address risk, control losses and manage exposures will be better prepared for a hardening market than those who do not.
Work with your broker now to prepare your agency for changes down the road. Contact Horton today to get started.