Bankers can expect more and deeper questions from the underwriters of their directors and officers (D&O) cover — and potentially an end to price discounts — after a series of high-profile failures and rescues.

Swiss bank UBS AG's takeover of struggling rival Credit Suisse AG on March 19 capped off a turbulent period where US banks Silicon Valley Bank and Signature Bank failed within two days of each other. The Federal Reserve stepped in to guarantee deposits in SVB, and HSBC Holdings PLC bought Silicon Valley's UK subsidiary. Securities class-action lawsuits have been filed against SVB Financial Group, Signature Bank and Credit Suisse.

While headlines focused on a handful of directly affected banks, the events woke insurers up to the potential risks across the banking spectrum.

"Whether insurance carriers are writing the Big 4 or 5 … or are somebody in my position writing banks in the hundreds of millions of assets, things changed last week," said Michael Whitbeck, assistant vice president of financial institutions at AmTrust Financial Services Inc., in an interview.

Unwelcome surprise

Before the recent events, underwriters of D&O liability insurance for financial institutions had been more concerned about emerging areas such as fintech, cryptocurrencies and distributed finance. Traditional banks will now, however, face more scrutiny, according to Priya Cherian Huskins, senior vice president, management liability at broker and consultant Woodruff-Sawyer & Co. Inc. "The fact that the less sexy, traditional banking sector is in trouble is an unwelcome surprise," she said via email.

Underwriters will want to know more about banks' interest rate sensitivity, investment portfolios, held-to-maturity securities and the identity of top depositors, Whitbeck said.

D&O covers the costs of defending companies' most senior employees against lawsuits alleging mismanagement. When investors lose money, lawsuits and D&O claims usually follow.

The takeovers of SVB and Credit Suisse "are going to involve significant losses to shareholders," Kevin Payne, chairman, financial institutions at Arthur J. Gallagher & Co., said in an interview. As part of Credit Suisse's rescue, the value of the bank's CHF 16 billion of Additional Tier 1 bonds was cut to zero, wiping out those bondholders' investments.

The overall situation is "inevitably going to fuel D&O claims," Payne said.

Companies requiring large amounts of D&O cover buy so-called towers, with layers of protection provided by different insurers. SVB, for example, had a $180 million D&O tower, The Insurer reported.

"The D&O insurance carriers that wrote the policies for the recently collapsed banks may be looking at full limits losses given the plethora of lawsuits being filed and government investigations being launched," Huskins said.

Paying closer attention

As well as assessing their exposure to the banks directly affected in the recent collapses, D&O insurers are now paying closer attention to those that may have similar exposures or operations, said Jeffrey Lattmann, executive managing director at Brown & Brown Inc. "They're going to take a hard line on those renewals from my perspective, where they may reduce capacity," he said.

While financial institutions D&O is in focus given the business of the failed and rescued companies, the effects could also spread to the commercial D&O space. "There is potential for the companies that were heavily deposited in these failed banking institutions to have some exposure," Hannah Tindal, head of D&O, London and Nordics at Allianz Global Corporate & Specialty SE, said in an interview.

Any claims will come at a difficult time for the D&O market, where the prices for cover have been falling as a market enlarged by new entrants, tempted in by previous hardening, competes for a smaller pool of business thanks to dwindling initial public offerings.

Underwriters, though, are not panicking. Payne said he is going through some renewals and "insurers have been very stable and consistent through that. We haven't seen anyone pulling quotes or anything remotely like that."

The Federal Reserve protection of SVB's deposits also provided some comfort. "The commercial D&O market may have dodged a bullet with a raft of insolvencies as a result of the government ... guaranteeing the deposits," Gary Lill, head of professional lines at Lloyd's of London insurer IQUW, said in an interview.

The recent bank failures in isolation are not a market-changing event given the size of the D&O market, Lill said, adding that he hopes it will deliver "a little bit of a short sharp shock."

Rate reductions in financial institutions D&O specifically have been more moderate than commercial D&O, Payne said, but even these are likely to be more restrained now. "There's a good chance that you'll see [financial institutions'] D&O rates probably stay flat," he said.

D&O underwriters are nonetheless on alert for further trouble. "The crisis has only just started — it may be contained rapidly, or it could expand," Philippe Gouraud, CEO of D&O underwriting agency Rising Edge Ltd., said via email. He added that it was difficult to predict whether actions taken to prevent contagion in the US, Switzerland and UK will restore confidence in financial markets. "That's the uncertainty that D&O underwriters are now facing," Gouraud said.