Directors and officers liability, or D&O, protects a company’s leaders against claims that they made poor decisions or breached their duties. It is one of the covers I place most often, and one of the most misunderstood at renewal. A common phone call goes like this: the premium is only a little higher, but the retention has doubled. Why?
What a retention is
The retention is the amount the company pays before the insurer starts paying. It works like a deductible, but on D&O it typically applies to defense costs as well as settlements, and it can differ by type of claim. A $250,000 retention means the company funds the first $250,000 of a covered claim itself.
Why carriers raise retentions
Underwriters use retentions as a pricing tool as well as a risk-sharing device. A higher retention lowers the carrier’s expected payout and reduces small claims that cost more to administer than they are worth. When a retention rises, it usually reflects one or more of the following, though the carrier will not always say which.
- Changes in your business, such as rapid growth, a financing round, an acquisition or a move toward a public offering.
- A change in your financial profile, including losses, tighter cash or covenant pressure.
- Developments in your industry that have led to more claims against company leaders.
- Reduced appetite from the carrier for your class of business.
- Poor loss experience on the policy itself.
Ask your broker for the underwriter's reasoning in writing. Even a short explanation helps you decide whether to accept the change, fix the underlying issue or move markets.
Not all retentions are equal
A single retention number can hide differences in how it applies. Some policies use separate retentions for securities claims, employment practices claims and other claims. Some apply a reduced retention if a claim is settled early. Some apply a higher one to specific events, like a merger or a bankruptcy. Reading the schedule closely matters more than looking at the headline.
Can you negotiate it back?
Sometimes. Whether you can depends on why it rose and how competitive the market is for your account. In our experience, three approaches help.
- Provide context. A short, honest letter from the CFO explaining a recent loss year or financing plan can soften an underwriter’s concern.
- Show controls. Board minutes, audit committee practices, whistleblower policies and clear governance charters help underwriters see the leadership team as a well-run group.
- Go to market. A competing quote is the strongest form of negotiation. It often leads the incumbent to reconsider.
Should you accept a higher retention?
It depends on the company’s ability to fund it. A retention is a commitment to pay a sum quickly, when a claim arrives, at a time you did not choose. A business with strong cash can reasonably accept a higher retention in exchange for a lower premium. A business with tighter finances may find a large retention hard to fund at the moment it matters most.
We suggest asking the finance team a simple question: if a claim arrived tomorrow, could we write a check for the full retention within 30 days without stress? If the answer is uncertain, the premium saving may not be worth the risk.
Watch for the related changes
A retention increase often arrives together with other adjustments, such as new exclusions, a reduced limit or a shorter reporting window after the policy ends. Compare the whole quote against the expiring one, line by line, instead of stopping at the retention.
What to do this quarter
- Compare your expiring and renewal retentions across every claim type.
- Ask what drove the change.
- Check your cash position against the new figure.
- Ask us to test the market if the terms look out of line.
If your D&O renewal came in with a higher retention, send us both quotes. We will compare them and tell you whether the change looks routine or worth challenging.
