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Capacity for D&O Grows but Underwriters Still Wary

Despite the additional capacity in the directors & officers market during 2020, the challenging environment continues as new risks emerge. 
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capacity for d&o grows but underwriters still wary

Over the past several years, directors and officers of public, private and nonprofit companies have been confronted with an ever-changing landscape, not least the dynamic changes in 2020. With the coronavirus pandemic, economic shutdowns and trillions of dollars of stimulus funding pumped into the economy, as well as social issues, including climate change, racial equity and diversity, the challenges for the directors & officers liability insurance market continue through 2021.

“While we can't predict what toll the current environment will have on our clients, it is important to note that the market was challenged prior to COVID-19," says Eric Senatore, senior vice president, commercial management liability, Sompo International. “Over the past five years, securities class action filings reached all-time highs driven by rising valuations amidst stock market volatility, mergers & acquisitions, an evolving regulatory landscape and event-driven litigation."

“Now, the challenge is to balance the resulting claims losses while managing through a more elevated risk environment created by the economic uncertainly of COVID-19," he adds.

In the last two years, “we saw rate increases that were high-double, and sometimes triple, digit percentage increases year over year," says Rodney Choo, senior vice president of executive lines, Risk Placement Services (RPS). “What counted as positive news in 2020 was that reported average increases in the fourth quarter were only around 40% to 50%."

Yet, while rates continue to be under pressure in 2021, capacity—and thus competition—is increasing as insurers enter on the excess lines side of the market.

“There's been some new market entrants that have come in offering additional capacity that we didn't have for most of 2020," says Christine Williams, CEO, financial services group, Aon. “That's helped create some competition, certainly on the excess side for some of the known risk programs."

However, “there's still a lot of underwriter uncertainty and concerns about systemic risks, as well as the financial wellbeing of certain insureds and their class of business," Williams says. “We're still seeing what we would call challenging market conditions as insurers continue to manage how much capacity they'll put out on a program. Currently, it's hard to get more than $10 million of limits from most insurers—you used to be able to get $15, $20, $25 million fairly easily."

As companies and senior leaders work through 2021, managing their D&O liability insurance programs and their related risks is crucial. In addition to the traditional risks faced, “environmental, social, and governance (ESG) risks—which include the environmental concerns of climate change and carbon footprint, the social issues of health and safety and community engagement, the governance risks of anti-corruption policies, and board diversity and executive compensation—are all top trends in the D&O market right now and do not have historical precedent as the basis for D&O claims," Senatore says. 

“There is heightened attention on such issues by both underwriters and our customers," agrees Jarrod Schlesinger, executive vice president, public company management liability, Chubb Financial Lines. “As a result, carriers have seen a number of shareholder lawsuits based on board diversity and other ESG issues in the past year."

Significant exposures also relate to company restructuring through other than traditional initial public offerings (IPO), such as special purpose acquisition companies (SPACs) and de-SPACs.

“SPACs were growing fast and furiously, but a combination of oversaturation in the market and new U.S. Securities and Exchange Commission accounting guidelines has resulted in a slowdown in the number of SPACs being launched," says Jonathon Palmquist, underwriter, management liability, Beazley. “After seeing so many SPACs early in the year, we now turn our eyes to the de-SPACs, which are starting to become more frequent. With the true risks of a de-SPAC still to be fully understood, the plaintiff bar has been paying close attention and we have seen a few large lawsuits come out of de-SPAC transactions."

“There have been a lot of suits around misleading statements to promote some of the SPACs," Williams says. “Seeing how they will play out over the next 12 months is going to be interesting and if insurers have to pay on some of these claims, I think that we'll continue to see pricing increase, retention increase, and the pool of primary insurers decrease."

Olivia Overman is IA content editor.