NSI Insurance Group
Jason Bishara, financial practice leader at NSI Insurance Group, sits down with Diana Bui to discuss the unique insurance challenges faced by micro and small-cap firms
Other than payroll, insurance is likely the largest expense for a small public company. Operational insurance, management liability (executive risk) insurance, and employee benefits. A properly implemented risk management plan leverages insurance to transfer and mitigate risk. Understanding a company’s risk profile and implementing a risk management programme requires specialised knowledge and is a significant time burden on executive management teams.
Executive management has a fiduciary responsibility to protect the interests of its shareholders, including protecting the assets of the company from unforeseen risk. Failure to execute proper risk strategies could expose the executive management team and board of directors’ personal assets. The burden of risk management typically falls under the purview of the chief financial officer (CFO). Larger companies may have an internal risk manager or someone who reports up to the CFO, however in most micro-cap and small-cap companies this initiative is led directly by the CFO. My team at NSI specialises in protecting the directors and officers by implementing outsourced risk management solutions and through the implementation of director and officers’ (D&O) strategies. Our goal is to provide the broadest coverage for the lowest cost.
Could you tell us about the specific challenges micro and small-cap companies face when seeking D&O coverage, and how NSI Insurance's new product addresses these?
The largest challenges a small public company faces when purchasing D&O insurance are cost, complexity, and the burden of time. The NSI proprietary D&O product addresses these challenges by adding unique coverage terms by way of endorsements that are specifically relevant to micro-cap or small-cap companies. These features add limit, reduce cost, and are pre-negotiated removing the complexity.
How does your partnership with HDI Global Specialty Insurer enhance the D&O offering, particularly for companies with market capitalisations under US$300 million?
Not all public companies are created equal. The risk profile of a company over US$300 million in market cap is significantly different from one that is under. Companies over this threshold tend to have stronger financials and represent more of a shareholder liability risk. Companies under this threshold tend to have weaker financials and pose an insolvency or bankruptcy risk.
Most micro-cap companies and many small-cap companies are forced to place their D&O with the excess and surplus lines market due to weaker financials. HDI is an admitted carrier with an AM Best ‘A+’ rating. Our partnership with HDI enables us to provide a higher quality product to these smaller public companies.
One of the standout features of your new D&O product is the Excess Side A Only coverage. Could you explain the significance of this additional layer of protection for company executives?
A standard D&O Policy has three primary insuring clauses. While coverage is provided for the D&Os on this standard policy through Side A, the ABCs are all sharing in the same policy limit. If there is a claim there is a high probability that the coverage limits will be exhausted quickly, especially if it is a shareholder liability claim.
This means there could be no limit left to defend the directors and officers. This is why any comprehensive executive risk programme should include Excess Side A Only coverage. Many companies under US$300 million do not elect to purchase the additional coverage due to cost and this leaves the D&Os significantly exposed. The NSI product has this coverage built in.
Side A Coverage: This is designed to protect the personal assets of directors and officers when indemnification by the company is not possible, either due to legal restrictions or financial insolvency of the company. In situations where the company cannot or will not indemnify its directors and officers, Side A steps in to fill the gap, providing direct coverage to the individuals themselves. This part of the policy is particularly important in severe cases where claims may threaten personal assets.
Side B Coverage: Often known as ‘company reimbursement’ coverage, Side B protects the company itself. It reimburses the company when it indemnifies its directors and officers, covering costs incurred from a claim against these individuals. Essentially, when the company pays the legal costs, settlements, or judgments for its directors or officers, Side B ensures the company is not left bearing these costs alone.
Side C Coverage: Also referred to as ‘entity coverage’, it extends protection to the company itself for claims made directly against it. Side C is particularly relevant for publicly traded companies, covering securities claims made against the company as an entity. This type of coverage has become increasingly important as lawsuits often name both individuals and the company as co-defendants.
The individual extended reporting period seems like an important benefit for executives. How does it provide a safety net for claims that arise after the policy period?
All D&O policies are written on a claims made basis. This means when the policy expires for any reason, including non-payment, all coverage stops. To ensure coverage continues you must continue to pay for the policy or purchase the extended reporting period (ERP) or Tail.
When a director or officer leaves a company, they have personal exposure for all their actions through their tenure for the next six years. When they leave a larger company that has strong financials they may not be concerned and may be confident the company will continue to pay for their D&O policy for the next six years or the company will purchase the Tail if something goes sideways. However, smaller companies with weaker financials increase the exposure to the D&Os.
The only way for a D&O to ensure they are protected when they leave a company is to Tail out the policy and then the company can purchase a new policy going forward. This means the Tail would cover anything that occurred from that day backward (to the retroactive date) for a period of one, three, or six years (whatever was purchased but the statute of limitations is six years).
The go forward, as the name suggests, would cover the company going forward. This is extremely costly — the cost of the Tail could be 300 per cent or more of the annual premium. So it is extremely rare for a company to purchase a Tail for an executive when they exit.
If a director or officer decides to leave a small company and the company does not pay for their policy, or the Tail, the D&Os have huge exposure. This is extremely common. With the NSI product you can purchase the Tail for an individual director or officer without Tailing out the entire policy for lite cost (US$22,000 for six years). This is the only D&O product in existence that offers this feature.
Given the rising focus on personal liability, how does NSI Insurance's solution help executives and board members better protect their personal assets?
Providing Excess Side A Only coverage at no cost and having a pre-negotiated individual Tail are the best ways to ensure there is coverage for the D&Os to defend themselves.
With the current lower interest rate environment and its impact on micro-caps, what trends do you foresee for these companies in 2025, particularly in risk management and insurance needs?
Rates have not dropped enough to help these small companies. Many of these companies have loans at lower rates that will reset now and through 2025 at higher rates.
This will have a negative impact on their earnings and could lead to downward pressure on their stock price. Down stocks lead to an increase in shareholder liability claims. It is likely a good time to review your policies and understand your coverage.
What unique risks do micro-cap companies face in this economic climate, and how can your D&O product help them mitigate and transfer these risks?
Bankruptcy or insolvency are the largest risks, especially in this climate. It is hard for companies to spend money on insurance when they have limited funds. Our product is a comprehensive and cost-effective solution, and if the company cannot pay for the coverage it is designed for the individual to pay their own portion of the premium so they can walk away from the business peacefully.
This year has seen several legal cases impacting the D&O insurance market. Could you highlight any key cases that have changed how micro-caps view their D&O coverage needs?
Most micro-caps view D&O as a necessary product to secure a board and/or financing. Other legal cases will impact this thought process very little unless they have a true operating business or have secured a large round of financing.
You have mentioned NSI's competitive advantage in offering a holistic suite of products, including D&O, cyber, and employment practice liability. How important is it for companies to bundle these coverages, and what trends do you see in cross-coverage integration?
It is not necessarily important to bundle but there are likely cost benefits. However, it is important to have all these lines of coverage.
All public companies have these exposures. Any claim for D&O, Cyber, Employment Practice Liability Insurance (EPLI) or Crime could end a business of this size.
As we approach 2025, what emerging risks should micro and small-cap companies keep on their radar, and how is NSI planning to evolve its offerings to address those?
I feel the largest risk micro-cap companies will face in 2025 is cyber liability and crime.
These coverages are commonly overlooked by micro-cap companies but these claims are much more common and could be a death sentence.
With your experience as a leader in the corporate insurance space, how do you see the role of financial practice leaders evolving in the coming years, particularly in niche markets like micro-caps?
Due to the lack of resources at micro-cap companies, they require their insurance brokers to be advisors and not just insurance sales professionals.
With increased pressure from regulators and more stringent requirements from the exchanges, the micro-caps need their insurance broker to be an outsourced risk manager who can advise on risk mitigation, risk transfer and corporate governance for the entire company.
What advice would you give to board members and executives of micro-cap companies who are looking to strengthen their risk management strategies amidst growing uncertainty?
In most cases, the person running the insurance programme has a strong personal relationship with their insurance broker.
I advise paying for an independent third party review of your current risk management programme.
If the results of the review are disheartening, interview several brokers but choose only one broker to represent you to the carrier market. Do not divide the market.
