Rates in most commercial and personal lines are inching toward flat. But in competitive spheres like D&O, insurance pricing tells a different story.
Privately Held Companies
Steve Cohen, senior vice president of management liability at Victor O. Schinnerer & Co., Inc., says many D&O carriers fought to attract and retain business during the protracted soft market just prior to 2009, when “there was a real turning of the market,” he says. Around 2010, “we saw rates really rocket up. That’s slowing down a little bit now.”
As the economy continues to find its footing, “D&O pricing is stabilizing in the private sector,” says Stephen Easley, national D&O practice leader for CNA management liability. “Since 2009, bankruptcy filings have been declining. That’s a good sign.”
In fact, for the rest of the year and early 2015, Cohen expects “3-5% rate increases even on clean risks,” he says. “Generally speaking from a pricing perspective, rates will probably continue to go up—they’ll be increasing at a decelerating pace.”
“This has always been a competitive market with many carriers looking for market share, so next year I anticipate market pricing being more competitive,” Easley adds. “But I think the difference is it’s not really going to be on a blanket basis as in years past. Markets will continue to be aggressive, but selective where they get aggressive, whether that’s based on industry class or account size or other underwriting factors.”
Publicly Traded Companies
Similarly, D&O for public companies will likely experience “relatively firm pricing on primary and up through the first and second excess layers,” says Tony Komro, management liability underwriter at Beazley Group.
The reasons? A “limited supply of primary carriers that are willing to step in on a consistent basis,” Komro explains. “And there’s still a realization in the market that primary layers are underpriced. A good number of programs also have retentions below where they should be—some accounts are both underpriced and underretentioned. The carriers are still trying to get back to where pricing and retentions really should be in order to support a profitable primary and lower attachment book long-term.”
As excess pricing continues to face mounting pressure from excess capacity and new players in the marketplace—“there are a lot more mouths to feed,” Komro notes—reinsurance rates in the insurance market have remained relatively soft thanks to consecutive light cat years. “There does not appear to be any recent event that would force the insurance market to feel balance sheet pressure to raise rates across the board,” Komro explains.
On the Horizon
Moving forward, the increasing number of IPOs in recent years is bound to have a significant impact on D&O for public companies. “It just makes sense that the percentage of claims derived out of IPO activity will revert to the historical mean,” Komro says. “I don’t think the market overall has really absorbed that yet. It probably won’t be for two or three years before IPO claims from the last two years start having material impact on a good number of carriers’ balance sheets.”
But if any one issue will transform both the private and public D&O insurance marketplace in the years to come, it will probably be cyber liability. “In the past it was operational, credit and financial risk,” Easley says. “But now cyber risk is real, and it needs to be managed.”
Although everyone in the insurance world knows about cyber liability, the coverage is “not nearly as penetrated as it should be,” Cohen says. “It’s an absolute business imperative. A lot of brokers, carriers and buyers don’t understand exactly what it is and what’s right for each company.”
Complicating that concern is a legal environment that’s constantly “running ahead of the insurance marketplace,” says Cohen, who compares today’s cyber liability market to the employment practices liability market of the 1990s. “I was an underwriter in the early ‘90s at a carrier that was one of the first ones to put out an EPL policy, and we always felt like the legal environment was one step ahead of us,” he says. “It was like every time you thought your policy was in good shape, some other legal development happened and now we had to figure out how to address that.”
While Cohen expects that the marketplace will eventually align itself with legal developments so that carriers can deliver “the proper coverage in real time,” for now he says many businesses still view cyber liability coverage as “a luxury—especially smaller companies,” he says. “They just don’t have the money to afford it. But they can’t afford not to have it.”
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Jacquelyn Connelly is IA senior editor.