After two years of significant rate increases for directors and officers (D&O) liability insurance, the market is finally starting to stabilize. D&O carriers have corrected their books and are now looking to write new business and compete with some fresh capacity that has entered the marketplace.
Median rate increases for D&O public companies have come down in the last year, according to Gallagher, hitting 7.5% in the fourth quarter (Q4) of 2021, compared to 36% in Q3 2020. The market for privately held companies remains challenging, with more than 50% getting double-digit rate increases in Q4 2021, but Gallagher expects pricing across the board to decline further and approach single-digit rate increases through 2022.
The reason for this steady improvement in the D&O marketplace, especially for public companies, is related to the claim activity, and the significant decrease in federal securities class actions (SCAs) in 2021.
Jennifer Sharkey, president of the Northeast management liability practice at Gallagher, commented: “When we think about claim activity, we obviously look at securities class actions, and 2017 through 2019 were really problematic years with a massive spike in D&O litigation coming from a lot of different areas - traditional core securities class actions, as well as Section 11 cases, IPO cases, and then M&A. When you look back at 2017, there were 198 M&A cases, and when you look at 2021, it’s down near 20, so there’s a significant shift there.”
In 2017, D&O insurers realized they needed a rate correction given the uptick in SCAs and claim activity – and rate adjustments were made across the board, not just for the problematic industry sectors. What followed was two-years of premium and retention adjustments, especially for IPOs and public companies, which Sharkey said caused some “rate fatigue” among Gallagher’s clients. But conditions grew more favorable in 2021.
“The number of class actions dropped largely due to the decline in M&A, and core Federal 10b-5 filings without Section 11 allegations,” said Sharkey. “While the number of initial public offerings (IPOs) rose significantly in 2021, which has been a big contributor to claims, the filings with 33 Act claims decreased for the second consecutive year. On the surface, the outlook is improving pretty significantly as it pertains to securities class actions, which is freeing up the marketplace a little bit to provide some relief on rate.”
However, D&O underwriters remain cautious because there are still derivative claims, which can be very problematic, there’s lots of SPAC and de-SPAC litigation, and there are still some concerns around COVID-19-related delays in filings and court hearings. Related to the pandemic, Sharkey also said underwriters are watching for new regulations from the Securities and Exchange Commission (SEC) as they pertain to public companies.
Looking ahead into 2022, Sharkey said she expects the marketplace to improve. She commented: “We’re seeing capacity [with] about 20 new insurers that are now in the D&O market. That’s been helpful. We’re seeing some incumbent insurers that provided lower limits, maybe during the harder market, be more open to providing higher limits, and we’re seeing some of the excess attachment points come in flat, sometimes with reductions. For the most part, we are not seeing much movement on the retentions. I think the D&O underwriters are feeling that the retentions they might have gotten right - although we are seeing stabilization in the retentions, especially as it comes to IPO and de-SPACS.
“Our projection for premium is that we’re seeing a flattening in the market due to better claim activity, more capacity, fewer cases, better dismissal rates. But also, it really depends on the risk. Some are experiencing decreases, but some clients that are high risk or have open claims may still see increases in certain spots. Terms and conditions are still extremely broad. We do still see some restrictions on Side A reinstatements and then often on derivative investigation costs, but beyond that, it remains very broad.”
