D&O remains a critical concern for life sciences organisations, with tough market conditions meaning early renewal discussions are more important than ever.

This winter, the UK and Ireland face an increased risk of blackouts and spiralling energy costs as demand continues to surge following the lifting of coronavirus (COVID-19) restrictions and a bounce-back in global economies. A recent fire shutting one of the UK’s major power cables until March 2022 adds security of supply pressure to the mix and couldn’t have come at a worse time for energy suppliers . National Grid ESO has been forced to fire up coal plants as gas prices soar across Europe due to shortages and increased demand from Asia while wind farms underperform with conditions leading to reduced yields. In Dublin, the constraints on the electricity network have prompted the government to explore providing emergency power generation to meet demand this winter . While in the UK, the National Grid ESO published its winter 2021/22 forecast months early, warning the margin of forecast electricity supplies might exceed demand by 5.3% . These concerns follow the cold snap that swept western Europe in January, leading to a near blackout across the continent. This call was too close for comfort and prompted a warning from the German Association of the Industrial Energy and Power Industry (VIK) to not "lose sight of the issue of grid stability and security of supply”. Yet, as winter 2021/22 looms, Europe’s fears suggest a multinational electricity outage in the region could still become a reality and, when coupled with the potential risk of fuel shortages, it shines the light on power security as a serious exposure for society and economies as a whole. As with Winter Storm Uri and Cyclone Klaus, the growth of renewable energy is typically only part of the story - there are many other contributing factors, several strikingly similar to the events in Europe and Texas, despite the different climates. So, what are these factors, and what part is the ongoing energy transition playing in these events?

The life sciences sector continues to be challenged by a tough D&O market, but a silver lining of greater potential market arbitrage in the wake of the pandemic, means a thoughtful renewal strategy can pay dividends. Life sciences organisation remain particularly vulnerable to class action lawsuits meaning directors’ and officers’ (D&O) coverage is a critical consideration for the sector. Stringent regulatory requirements, the zero-sum nature of clinical trials outcomes, and the need for new funding rounds and IPOs as firms develop, mean life sciences organisations are particularly vulnerable to litigation. Add in the emotive nature of some of the cures they are seeking to develop – and the potential fall-out from failures – and it is apparent that firms need to closely consider and mitigate their exposures. In the US, the sector continues to face more litigation than any other industry, with around a quarter of securities trials in 2020 involving life sciences organisations.

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The state of play: D&O renewals 2021 YoY Average % Change

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Jayne Minihane D&O – EMEA jayne.minihane@aon.co.uk

Kieran Dillon D&O – EMEA kieran.dillon2@aon.co.uk

Kristin Kraeger D&O – North America kristin.kraeger1@aon.com

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Turning to the D&O market for reassurance - if not answers - the sector is however finding market conditions challenging. Increasing premiums, rising self-insured retentions and limited capacity are increasing challenges for life sciences organisations, with two areas of particular concern for the market. Insurers are most cautious post-IPO, when there is considerable scope for securities fraud allegations linked to share price performance, while M&A is also looked at with concern, as integrations can prompt accusations of failures in due diligence that can also lead to litigation. Add in lawsuits linked to the pandemic, and it is apparent that the unique challenges firms face in the D&O space aren’t going away any time soon. And it is apparent that the coverage available to clients is also changing and in some instances contracting. In some geographies, such as EU and Asia, insurers are increasingly reticent to write full ABC coverage, with a number willing to only write Side A coverage. Side A is intended to protect against non-indemnifiable risk, for example insolvency, which is critical for pre-IPO and smaller firms; but is leaving gaps for more developed organisations within the sector. For those insurers still offering ABC coverage, there has been a considerable increase in rates and deductibles, as clients are expected to retain more risk.

Market responses

Conditions mean that firms need to take a proactive approach to renewals. One that puts them on the front foot in helping insurers to better understand their risk profile. Meeting with primary and excess insurers is essential, as firms look to cast their risks in the best possible light. It helps if they can bring their CFO or CEO into the conversation, as these leaders are best positioned to sell their company and its position to the market. Fortunately, the introduction of widespread remote working brought on by COVID-19 has made marketing risks to a global panel of insurers a more efficient and effective process. The ability to get the decisions makers on the calls and to listen to the corporate story by virtual meetings has been a meaningful benefit for corporations. And brokers have been using this dynamic to increase the options available to life sciences clients, bringing in markets from London, Bermuda, Europe, the US and Asia. The global marketplace is also seeing some new market entrants. The opportunity through off-cycle meetings to meet and build relationships with these new players can build on the strategy of deploying the global marketplace to compete the business.

Renewals silver linings

It is apparent from these meetings that there are differing appetites for life sciences’ D&O risks globally and there are opportunities to arbitrage these variations - and even among the global offices of individual insurers. Additionally, the challenging market affords an opportunity for organisations to re-evaluate their program structures and explore alternative risk transfer options. Concepts around utilisation of a captive structure or other alternative methods can be an important feature of a robust and strategic renewal approach. Areas of particular consideration include form language – an issue that is critical if the organisation is considering an IPO – and the indemnification provisions for directors where ABC coverage is being sought. It is also worth bearing in mind that reporting standards are coming under increasingly close scrutiny, particularly where there are US risks involved. Conditions mean that it is more important than ever to have the right risk partners in place, in order to navigate a particularly challenging market and the technical requirements of a D&O programme. Aon is working with life sciences globally to navigate conditions and is encouraging organisations to engage positively with markets in order to achieve the best possible renewal.

Our experts

If you would like to discuss any aspects of these insights, or to better understand our capabilities in this area, please do not hesitate to get in contact with our team.

Lars Sorensen Life Sciences Industry Leader – Global lars.sorensen@aon.com

Meaghan Piscitelli Life Sciences Industry Leader – Global meaghan.piscitelli@radford.com

Anne-Christine Fischer Life Sciences Consulting Leader – Global anne-christine.fischer@aon.de

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If you would like to discuss any aspects of these insights, or to better understand our capabilities in this area, please do not hesitate to get in contact with our team.

Lars Sorensen Life Sciences Industry Leader – Global lars.sorensen@aon.com

Meaghan Piscitelli Life Sciences Industry Leader – Global meaghan.piscitelli@radford.com

Anne-Christine Fischer Life Sciences Consulting Leader – Global anne-christine.fischer@aon.de

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Yet, as winter 2021/22 looms, Europe’s fears suggest a multinational electricity outage in the region could still become a reality and, when coupled with the potential risk of fuel shortages, it shines the light on power security as a serious exposure for society and economies as a whole.

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