The best preparation is early preparation, given the current state of the market. Here’s some advice on how to build your D&O program and information about executive liability.
By Greg Boornazian, Christie Vu and Ben Young
Small and medium-sized businesses may face even greater risk for financial impairment in the coming months due to the reduced availability of credit, interest rate increases and the tightening of lending guidelines. With the current state of the market, now is the best time to review your organization’s Directors & Officers (D&O) insurance with your broker to determine if your organization and executives are adequately protected in the event a financial impairment does occur. To help prepare you for coverage negotiations with your insurer, here are a few considerations that underwriters will look for when evaluating companies for D&O coverage:
4 D&O Placement Tips from the Underwriting Perspective
1. Start early.
Reviewing your D&O insurance program with your broker as early as possible before any potential bankruptcy provides you with the ability to design a program to protect your company and directors and officers in the event a bankruptcy does occur. This allows for better opportunities in the negotiation process for favorable coverage. The closer the company heads to financial impairment, the less likely an insurer will enhance any policy terms or conditions.
2. Be upfront about the organization’s challenges and strategy.
Underwriters perform an individual risk assessment on the company and look at the macro environment in general, such as market conditions, political changes, segment bubbles and court decisions. While each risk is unique, underwriters manage a book of business with many homogenous groupings. It’s likely your strategic themes will be similar to other risks they have reviewed. Specific details about your funding strategy, profitability plans, unique business model or geographic strengths in your particular segment can make a difference.
Treat your underwriters like they are potential investors in your company. Market conditions for underwriters harden and soften in cycles too so they may be understanding and open to learning how interest rate hikes, high-profile bankruptcies, pandemic-related securities cases, supply chain issues or staffing challenges may impact your company.
Be prepared to answer the following questions that underwriters may ask:
- Have there been any operational changes? Examples include: any exit from product lines or geographic areas, any downsizing, divestiture or “cash conservation” strategies being implemented, or any past management strategies resulting in an unmanageable risk burden or persistent net losses.
- Have you engaged with any third party turn around specialists?
- Has there been any one-time write-down requirements or other accounting change implementations, including a change in auditor?
3. Meet in person or virtually with underwriters
Addressing potential underwriter concerns may facilitate a smoother D&O placement when conditions are at risk of deteriorating. Relationships matter and with new capacity in the market there are several experienced underwriting teams interested in getting to know more about your risk and reestablishing or forging new relationships with your executive teams. Underwriters who spend time with management to understand the cycles of a given business or strategies to combat threats to profitability may be more agreeable to offer capacity.
4. Elevate the discussion
Include your own experts in the discussion. Chief financial officers, risk managers and general counsel are well suited to best connect with underwriters and add color to the conversation on the spot.
Underwriters prepare for these meetings and will want to engage at a meaningful level to help differentiate your risk from others based on more detail than can be gleaned from an application. By sharing the most recent audited financial statements with notes ahead of time, an underwriter will be able to drill down on certain facets of your company such as details regarding loan covenant defaults and waivers, cash burn coverage capability for the next 12-18 months, accounts receivable / accounts payable imbalances, long-term debt payment obligations, EBITDA and net income trends, and net loss explanations including reasons such as depreciation versus interest expense.
Also, prepare interim and pro forma information to support management’s thesis. These are critical underwriting details that create a more complete financial picture of the company.
These are just a few examples of what underwriters are looking to understand when evaluating the financial health of the company but addressing them directly may be conducive to better terms overall. For more advice on how to build your D&O program and to learn more about executive liability, B&B Protector Plans. For more information on what your D&O policy should include ahead of bankruptcy, read Part I of this series.
This information is intended for informational purposes only. Protector Plans Executive Liability is not liable for any loss or damage arising out of or in connection with the use of this information.