Earlier this week, the directors’ and officers’ (D&O) insurance market came together for the PLUS D&O Symposium dedicated to helping market participants stay ahead in a rapidly changing industry landscape.
Sharing some of the insights generated in conversation with Insurance Business, Paul Shore (pictured), CEO of Tegron Specialty highlighted some of the key trends dominating D&O conversations today. Exposure base continues to increase, he said, with higher frequency and severity of securities class action lawsuits coupled with high levels of corporate bankruptcies.
Despite this, he said, the market is in the fourth year of significant rate reductions and lowering of deductibles. “Ultimately supply and demand dictate the market for long tail business. The rates and terms offered between 2019 and 2022 were irrationally high, and we’re now on a path where these rates are becoming irrationally low.”
Exploring some of the external market conditions driving these trends, he highlighted that, from a risk perspective, the sector continues to see the impact of COVID, which exacerbated conditions. Cheap money, government support, and high inflation have given way to a quick rise in interest rates. Companies have had to react to a lot of defining moments in quick succession.
“The world has become a lot more unstable and unpredictable in the last few years, which affects consumer and investor confidence,” he said. “Wars, tariffs, and changing ESG attitudes are among the factors creating increased risk events for D&O insurance. The world is changing faster, and with more extremities, than I’ve experienced to date in my career.
“From a market dynamics perspective, the significant increase in rates, and ergo revenue, encouraged insurers to invest in the D&O product line. These costs increase at least in line with inflation, so there is pressure to maintain, or even increase, revenue in a declining market. The same is true on the broker side.”
The question mark over what’s happening with bankruptcies and why these are occurring at a record rate ultimately comes down to the driving force which is higher interest rates, according to Shore. Money has been cheap since the global financial crisis, he said, effectively keeping borderline companies afloat.
Meanwhile, government support during COVID kept zombie companies alive too. Inflation has compressed margins and reduced the available spend of the average consumer. Interest rate rises both increased the cost of debt and consequently took the froth out of the equity market, he said, which made it more difficult for unprofitable companies to raise funds.
Tariffs have been a topic of conversation for the market for a while now and Shore shared his insights into the potential consequences these could be expected to have. The rhetoric is that tariffs are a tax on the exporting country. However, he said, for the most part, it will be the US consumers that will be faced with higher prices.
“Not everything the US consumes can be produced in the US,” he said. “It will have impacts on supply chains and increase production costs which will slow economic growth and potentially lead to job losses. The price US companies have to pay for aluminium and steel has already risen sharply which could be a good example to temper further tariffs.
“To dilute this negative impact on consumers, the US will need a weaker dollar but the Fed won’t be able to cut interest rates as quickly given a lack of growth and higher inflation. Ultimately all this leads to financial strain on most companies. More claims in D&O occur in weak economic conditions. Smaller, national US businesses that are not reliant on imports should thrive as long as they are in staple business sectors versus discretionary.”
Turning his attention to what’s happening in the IPO space, Shore noted that if the markets can settle down and gain some confidence, there should be a significant uptick in IPOs this year. “I am a little fearful that it could be quantity over quality similar to 2021, especially with so many PE portfolio companies which have exceeded their sell-by date with the equity markets being a popular place to realise its investment gains.”
These companies are normally highly leveraged though, he said, so will be impacted by the dynamics mentioned above. “To date we have quoted a number of solid companies that are going through the IPO process so we do have some optimism. These do however bring increased securities risk so D&O insurer excitement should be tempered.”
