Viewpoint: D&O insurers should tap into central and south-eastern Europe’s growth potential

Financial lines insurance capacity in the central and south-eastern Europe (CSEE) region has not been the most stable over the past decades – in fact, the region saw more than one insurer closing down operations or being sold off to a competitor.

In particular, larger re/insurance organisations with a worldwide scope struggle to appreciate the region’s potential. The relatively small territories, each with its specific cultural characteristics and own language, make it difficult to run with a one-size-fits-all approach.

But there are regional nuances and opportunities that make the CSEE region a very interesting prospect, with particularly strong demand for directors’ and officers’ (D&O) liability insurance capacity paired with expert local knowledge.

The struggle with global inflationary and supply chain pressures, soaring energy prices, and intense regulatory scrutiny from all angles – not least their response to sanctions, environmental, social and governance (ESG) policies and cyber security, certainly lead to some sectors across Europe finding it more difficult to renew their insurance programmes.

Price stability

While most continental European D&O markets saw hardening rates before and during the coronavirus pandemic, pricing turned just as quickly back into a much softer environment over the past year, with especially significant price reductions on excess lines. However, the CSEE region stood out overall by remaining comparatively stable from a pricing perspective.

Looking ahead to 2023, amid continuing volatile economic and labour conditions and in a world of fast-paced emerging risks, from cyber crime to ESG compliance, it is no surprise D&O insurance will continue to be a boardroom topic across Europe as companies negotiate their insurance renewals.

The potential for these issues to become significant exposures for insurers in 2023 is clear and, in an increasingly litigious world, the macroeconomic inflationary pressures are also having an impact on the size of potential claims settlements as a result of increased defence costs.

Looking ahead to 2023, amid continuing volatile economic and labour conditions and in a world of fast-paced emerging risks, from cyber crime to ESG compliance, it is no surprise D&O insurance will continue to be a boardroom topic across Europe as companies negotiate their insurance renewals

This combined picture has made some insurers reluctant about providing capacity for Europe’s directors and officers and while large corporate entities are still broadly able to secure capacity at renewal, certain industry segments, especially for smaller companies, are underserved in the region.

However, the growth potential of the CSEE, fuelled by comparably sound economic growth figures, is self-evident to those present on the ground. But, by treating the region as a whole, without looking beyond and without understanding each country’s specific economic development and its corresponding needs, some global re/insurers may come to the conclusion the region is not interesting enough because of its overall limited size and still lower penetration rates.

New focus

By better understanding the regional nuances and developments, it is clear that CSEE represents a new frontier for growth as demand for executive risk insurance increases sharply among the region’s vibrant and fast-developing financial line small to medium-sized enterprises (SMEs) and start-ups.

A further argument playing in favour of CSEE is the recent divestitures in the financial services sector – new companies have emerged in the region including neo banks, and a vibrant and ambitious local start-up environment is maturing, focused on harnessing data and technology for innovative online business propositions. Indeed, several CSEE countries have fast-developing technology sectors and a dynamic fintech scene, where demand for other insurance products may arise too.

GDP levels and employment costs across CSEE result in a generally lower cost of labour compared with Western Europe, with comparatively higher productivity and margins, leading to strong prospects for a growth environment.

This has already attracted the attention of private equity investors, which have started looking to the region following fierce competition for opportunities in Western Europe. Several CSEE countries belong to the group with the highest economic growth rates within the EU. This is ultimately based on emerging new entities, but equally on the rapid growth of the local market leaders, translating both into demand for additional capacity and insurance-specific solutions.

But there are also challenges in insuring companies in the region, particularly regarding companies with significant Russian exposure. While many multi­national companies decided rapidly after the beginning of the war to close down their operations in Russia to protect their brand, the task for more regional entities is much more complex, as the Russian market was an interesting and crucial market for reaching critical levels of demand. For this reason, a full shutdown was synonymous for a complete reorientation and accepting a period of economic struggle and could not be achieved overnight.

ESG scrutiny

While ESG is a main topic in multinational’s board rooms as a result of increased scrutiny from financial markets, many companies have only recently been bringing more awareness to these relatively new topics focused on more sustainable corporate governance frameworks.

However, cheered by interest from foreign capital investment and the accompanying board representation that often follows, there is an increased awareness of the responsibilities of company directors and officers in CSEE. This is driving up interest in and demand for quality D&O insurance and leadership.

In Poland, for instance, where the largest component of the economy is the service sector (62.3.%), there are many businesses wanting to expand their international footprint (for exampe, IT companies wanting to expand in the West – mostly US) and, as a result, growing demand for local and international D&O programmes, which is met with a distinct lack of local capacity.

This is just one example, but the big picture is penetration rates for financial lines D&O insurance across the CSEE have clear scope for growth – and the market has, broadly speaking, been underserved by larger multinational insurers and brokers.

There is scope for market education on a local level: for instance, helping an organisation decide where D&O policies best reside within their company’s overall insurance structure. Is D&O embedded as part of a wider holistic risk management policy? Or is it better for the business model of the company to investigate standalone D&O?

While we feel there is a need for an open discussion about the advantages and disadvantages of both approaches for a specific organisation, ultimately the trend for increased awareness and uptake of D&O as a standalone product will lead to a more mature D&O market with tailor-made coverage and more adequate insurance limit management in the near future.

Local knowledge, a personalised approach and trust are critical when building D&O and financial lines opportunities in the SME sector in CSEE, where much more emphasis is placed on a service provider educating and providing support to the policyholder and offering solutions that will help them secure the best-in-class coverage that meets international standards.

To close the coverage gap and effectively meet demand in the region for quality D&O cover, it is critical to work with an expert partner with local knowledge that is trusted by a local network of brokers. In addition, there is a market education programme required, by raising awareness and assisting with product knowledge where necessary while understanding  cultural nuances. Technology will support this drive, particularly with the automation of business processes resulting in far better and more efficient distribution of financial lines products and services and far better and more efficient user experiences.

By its very nature, executive risk is constantly evolving, as is the legal environment that surrounds company leaders and how they are held accountable for the performance of their business and the decisions they make.

There is no doubt there are the foundations for strong growth in the CSEE region in the coming years. This is a territory that is emerging as a hotspot for innovative, interesting and forward-thinking businesses and stronger D&O insurance support can and should help this market develop into a more diverse, inclusive and compliant marketplace and, ultimately, nurture a new wave of growth.

Paulina Radgowska is head of business development, CSEE at Alta Signa