July 18, 2019
How to Deliver Tough Message on D&O
by Mary Henderson and Rich Edsall
When a market is challenging, delivering difficult news takes clear, honest communication and a commitment to listen.
Relationships are the key to success in the insurance industry. Trust and respect go a long way when it’s time to deliver challenging news. For example, the firming of the directors and officers (D&O) market has led to tough conversations about increasing rates.
The best way to handle these conversations is to make sure your communication skills are in excellent shape – and that means both what you say and how well you listen.
How to announce a price increase to clients: Plan ahead and be clear
Preparation is key. Take the time to identify potential high-risk accounts early, with 90-day reviews. Our clients aren’t happy to hear their rates are going up, but it helps to have conversations early to explain the reasons for rate increases. With pricing down 50% over the last 10 years, a market adjustment has been due for some time. In fact, price increases in the current D&O market are a good sign for the industry’s long-term health.
Be sure to take the time to explain the main drivers for rate increases, which are being experienced by public companies, private companies and financial institutions, including large private equity firms and large banks:
- The number of claims has risen.
- Capacity has decreased with the departure of carriers.
- Defense costs have risen, in part because of coverage expansions and increased loss costs.
Securities claims on a yearly basis are up, and, because there are fewer public companies now than there were 10 years ago, the chances of attracting securities litigation is even greater. We owe it to our clients to be open about the realities of the market and their impact on rates. Bear in mind: How we announce a price increase to clients and brokers will have a lasting impact on our relationships going forward. The markets that handle this communication effectively will be the ones that succeed in the long run.
See also: How to Be Disruptive in Emerging Markets
Be transparent about how underwriters evaluate a risk
Underwriters base their risk evaluations on data. Reminding clients of the factors that contribute to their increased rates can help alleviate some of their distress. These factors include:
- Financial strength
- The class of business
- Strength of the leadership
- Business track record
- M&A activity
- Organizational structure
- Claims history
While it’s important to be straightforward in explaining the facts underlying a risk evaluation, it’s just as important to demonstrate your understanding of your client’s position. We view our relationships with clients and brokers as partnerships, and we want to deal with people fairly and honestly and communicate our position.
Be effectively empathetic – and actively listen
It takes effort to be effectively empathetic. Saying, “I know this isn’t what you want to hear,” is not enough. Consider these steps to validate the reactions you will receive when it’s time to share not-so-good news:
- Put aside your viewpoint
- Validate the other person’s perspective
- Examine your attitude
- Ask what the other person would do
Be prepared to respond to objections
It’s only natural that bad news will meet resistance. Here’s how we suggest keeping the conversation on track.
- Objection: Why is my rate increasing in the absence of a claim?
Response: Rate increases depend on risk and current pricing, which is affected by increases in regulatory costs for financial institutions, in defense costs and in claim frequency.
- Objection: I may have to go to RFP if rates increase.
Response: We understand your position and wanted to give you an update early for our due diligence and your ability to market the risk with other carriers.
- Objection: This account was written new last year. Why the increase this year?
Response: Accounts are evaluated annually, and defense and regulatory costs increased over the past year.
- Objection: Why are both the underlying and the excess rates increasing?
Response: We know this news is hard to hear. The market is adjusting after a lengthy period of low rates. We’ve seen more price compressions for excess than for primary, which has created even more need for excess rate increases.
In our careers, we’ve come to anticipate that the marketplace will continue to change. It’s essential to keep your skills refined for when the time comes to have tough conversations.