Many are finding that the marketplace for Directors and Officers (D&O) liability insurance is easing in the final quarter of 2022. New entrants to the space are competing for accounts, and underwriters are becoming more comfortable with certain risk classes. Trend data compiled and tracked by CRC Group indicates average renewal rate increases are slowing, and more accounts are renewing with flat to small increases compared with earlier in 2022 (source 1).
Rapid premium growth for D&O risks and the lowest loss ratios in years have created conditions in which insurers are comfortable negotiating lower rates and, for some accounts, relaxing terms and conditions.2 Accounts without material changes in their exposure or significant claims may have room to negotiate with underwriters. For example, previously insurers were unwilling to remove standard exclusions or agree to reduce risk retentions, but more markets are open to entertaining those changes now.
Concerns over the economic outlook – inflation, unemployment, and slowing growth – cast a long shadow on D&O. Understanding an account’s financial picture has always been important to D&O underwriters, but a clear view of an insured’s finances is now a requirement to obtain a quote. Retailers and insureds can expect more questions and a greater focus on finances from underwriters in the current marketplace.
The D&O marketplace hardened for public companies in 2019, just before the impact of the global pandemic hit in 2020, and quickly ratcheted upward. Throughout 2021, rates remained high, and terms and conditions were tight. Factors that lifted public D&O rates included: class-action securities litigation, concerns about pandemic-induced bankruptcies, and the proliferation of special-purpose acquisition companies (SPACs). However, in 2022 pricing has dropped significantly, enabling some public companies to obtain coverage with rate reductions of more than 50%. Securities class-action lawsuits, a bellwether claim in public company D&O, have decreased in each of the past three years, according to the Securities Class Action Clearinghouse. Through September 2022, the SCAC reported 164 securities class-action filings, the lowest number of such filings since 2012.3
The entrance of new capital in public D&O – led by some managing general agencies and traditional insurance companies – has led to dramatic price reductions in primary as well as excess. This has created a real dichotomy in the public D&O market because while rates are declining there are more than 500 open securities claims, which is concerning to many public D&O underwriters. During 2022, rates for primary D&O coverage have dropped by 15% - 20%, with more reduction coming on the excess, as Increased Limit Factors (ILF) are coming down from a high of 90% to a range of 60% - 70%. On the other hand, D&O coverage remains expensive for certain sectors, including blockchain, cryptocurrency, and cannabis.
SPACS & DE-SPACS: A PUBLIC D&O CONCERN
Special-purpose acquisition companies, known variously as “blank-check companies” or SPACs, surged in 2020 and 2021. Hundreds of SPACs formed in that period, attracting enormous amounts of capital as an alternative to the traditional initial public offering (IPO) process. SPACs raise capital through a streamlined IPO and use the proceeds to complete an acquisition, generally within two years. The process of a SPAC taking a private company public is known as a de-SPAC transaction, and deSPACs have first-impression coverage issues that are best addressed by a knowledgeable broker. As popular as blank-check companies have become, they have considerable D&O liability exposure through all phases of their lifecycle – from initial capital raising to completing or failing to complete an acquisition or acts committed by the acquired operating company after it becomes public.
Market volatility and a buyback tax imposed under the Inflation Reduction Act in 2022 have led to dozens of liquidations of SPAC deals worth a total of nearly $13 billion.4 Performance of newly public companies following de-SPACs has been mixed, which can increase the likelihood of shareholder litigation. SPAC litigation is the biggest trend in securities lawsuit filings, according to the Securities Class-Action Clearinghouse, which has tracked SPAC-related litigation since January 2019. Behind SPAC lawsuits are cryptocurrency filings and COVID-19-related securities lawsuits.5
2020 and 2021 were difficult years for private companies buying D&O liability coverage, and the overall impact of the COVID-19 pandemic on private D&O policies remains to be seen. Private D&O includes coverage for employment practices, as well as protection for individual directors and officers. Observers believe employment claims are in the pipeline, which may drive up private company D&O losses.
During renewals, carriers are likely to negotiate on price first and then may look at changes in retention. Retailers and insureds should expect flat renewals to a 5% increase unless an account’s risk factors change. Insurers’ appetite for D&O risks is largely the same. The toughest classes remain cryptocurrency, non-fungible tokens, late-stage biotechnology, life sciences, and hospitals. The higher cost of capital due to rising interest rates may challenge private companies with debt accumulation. Accounts that have substantial debt are likely to face questions from underwriters, who will scrutinize how companies plan to repay their debt. Survivability and debt condition will continue to be areas of focus in D&O underwriting.
Rating factors D&O underwriters use to assess nonprofit organizations are similar to those for private companies, though nonprofits generally have far lower risk retentions and coverage is less expensive than for private entities. D&O pricing for nonprofits usually jumps sharply once an account has a claim. The price increase at the following renewal can result in sticker shock for many nonprofits. Just as publicly traded and private companies face litigation exposure arising from employment practices during the pandemic, so too do nonprofits. The COVID-19 outbreak and lockdowns forced many nonprofit organizations to lay off staff and/or curtail services. COVID-19-related claims are expected to emerge, but their impact on companies remains unclear.6
Retail agents and brokers should consider leveraging the current marketplace to promote D&O liability coverage with insureds. The easing of rates is a positive opportunity for first-time buyers of D&O policies. However, pricing is not the only consideration for D&O coverage. Terms and exclusions can make a significant difference in the breadth of coverage. Financials are more important than ever. Insurers have traditionally required interim financials but are now likely to also require financial data from the most recent period within six months of the renewal date. Clearly articulating any financial concerns or issues, and explaining risk mitigation plans will be key to navigating the marketplace.
Retailers should get submissions in as early as possible, with the most up-to-date financial data available. It’s also helpful to anticipate underwriters’ questions and provide annual audited financials or interim financial results – as these are typically now a requirement for D&O submissions. Finally, retailers would be wise to market every account as the market has substantial opportunity for more advantageous pricing, terms, and conditions for many classes of business. Partnering with knowledgeable wholesale partners can also help ensure that your clients benefit from the best possible coverage and price available. Contact your local CRC Group producer to learn more about how we can help your clients make the most of today’s D&O marketplace.
- Ed Antonucci is a Director within the ExecPro Practice Group in CRC Group’s Chicago office.
- Allyson Benda is a Senior Broker and Vice President with CRC Group’s Franklin, Tennessee, office and a member of the ExecPro Practice Group.
- Brian Martin is a Broker with CRC Group’s Dallas office and a member of the ExecPro Practice Group.
- Matt Patterson is Vice President with CRC Group’s Jenkintown, Pennsylvania office and a member of the ExecPro Practice Group.
- Matthew Whitelaw is Senior Vice President of Financial Services with CRC Group’s San Francisco office and a member of the ExecPro Practice Group.
- "Private D&O REDY Index, October 2022,” CRC Group. https://www.crcgroup.com/Tools-Intel/post/private-d-o-redy-index-october-2022
- "D&O premiums grow 38.5% in 2021; loss ratio falls to multiyear low,” SPGlobal, May 5, 2022; https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/d-o-premiums-grow-38-5-in-2021-loss-ratio-falls-to-multiyear-low-70106981
- “Federal Securities Class Action Litigation 1996 – YTD,” Securities Class-Action Clearinghouse; https://securities.stanford.edu/charts.html
- “SPAC liquidations top $12 billion this year as sponsors grapple with tough market, new buyback tax,” CBNC, October 19, 2022; https://www. cnbc.com/2022/10/19/spac-liquidations-top-12-billion-this-year-as-sponsors-grapple-with-tough-market-new-buyback-tax.html
- “Current Trends in Securities Class Action Filings,” Securities Class Action Clearinghouse; https://securities.stanford.edu/current-trends.html
- “COVID-19 as a workplace crisis: Seeking insights from the nonprofit workers’ perspective,” National Library of Medicine, April 5, 2021; https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8250796/
- Value of Directors and Officers (D&O) Insurance Premiums Written in the United States from Q1 2018 to Q1 2022, Statista, August 16, 2022. https://www.statista.com/statistics/884870/volume-dando-premiums-usa/#:~:text=Take%2Dup%20of%20directors%20and,U.S.%20 dollars%20a%20year%20earlier.