2017 was a rough year for directors & officers insurance.
Merger objection lawsuits reached an all-time high, data breach lawsuits started picking up steam, and the #MeToo movement opened the door for more sexual misconduct allegations against management as public outcry started lowering the stigma associated with reporting these crimes.
“The claims experience in D&O generally has been poor, particularly for public company D&O, which was at historically high levels in 2017,” points out Kevin LaCroix, Esq., attorney and executive vice president at RT ProExec, a division of R-T specialty, LLC. “Anyone who’s paying attention to that space has to be a little bit alarmed.”
But despite claims frequency, Bob Bregman, senior research analyst at the International Risk Management Institute (IRMI), doesn’t believe claims in the space have combined frequency with severity in a way that will significantly impact D&O insurance pricing.
“With the M&A stuff there’s been frequency, but they haven’t paid the big settlements,” Bregman points out. And while “there are event-driven claims” in areas like cyber and sexual misconduct—“and those matter,” he says—“you don’t see a wave of them. You see isolated claims, but you don’t see a whole bunch of high-severity securities class actions based on stock drops or financial fraud the way we have in previous generations.”
As a result, Peter R. Taffae, managing director at ExecutivePerils, says the D&O insurance market remains “relatively soft”—especially in excess & surplus: “The primary is starting to firm up a little bit, but the excess is still going a little crazy.”
Sean Jordan, research analyst at IRMI, agrees that D&O excess is “even more competitive than the rest of the market. That’s just another sign of underwriter confidence—they’re thinking, ‘OK, this layer’s not really going to be tapped into.’”
As Bregman points out, “where are the big losses that impact these layers? You haven’t seen the big, big claims that penetrate the tower. They’re at the bottom, not the top, so everybody wants to write excess. They’re thinking it’s free money, that nothing’s going to happen.”
There are a few exceptions, including financial institutions—a category Taffae says includes insurance companies, private equity and venture capital firms, and banks. “They’re now entering a hard market, because some of the major players are pulling out,” he explains. “One carrier recently got killed on insurance company D&O and E&O and private equity E&O and D&O. They are doubling, tripling rates and retentions. And they’re not the only ones.”
And notoriously difficult classes like life sciences, pharmaceutical and technology “are getting rate increases and possibly higher retentions,” Jordan points out.
But Bregman says they’re “the minority”—and he believes D&O underwriters are “making out like bandits” in the current market. “What really significant losses are you paying out there that’s mandating the need for higher rates? They haven’t happened in a long, long time,” he points out. “The few big settlement numbers that are out there are the last-gasp hangovers from the financial crisis seven, eight years ago.”
Granted, if the stock market starts tumbling this year or next, “bad things are going to happen,” Bregman says. “That’s the only real route for getting significant rate increases and more premium—when the music stops, the shareholder stock drop claims could come back with a vengeance.”
But that’s not a concern in the current D&O market, which is currently inundated with an overabundance of capacity.
“What we have seen is an inexorable increase and influx of new insurers into the D&O market,” Bregman says. “As long as you have new entrants into this market, it’s going to create downward pressure on the general level of rates—if all the big guys keep asking for more premium, more premium, more premium, insureds are going to say, ‘If a new entrant is offering me 10% less, then why should I stay with you?’”
With new entrants that haven’t proven their clout during claim time, do you get what you pay for? Not necessarily—Bregman believes the coverage breadth offered by the carriers entering the D&O space in recent years is “pretty comparable to the big guys. While we haven’t seen these new entrants coming up with vast new coverage innovations, for the most part, they pretty much match the established insurers. Their coverage is quite close.”
“It’s always good to be wary of new entrants, but I think the marketplace is so competitive that you’re going to run yourself out of competition if you have provisions that are significantly more restrictive than other competitors,” Jordan agrees. “There’s just such an opportunity to go out and price shop, for lack of a better term. The competition keeps things pretty favorable for insureds in terms of coverage.”
In the years ahead, the number of new entrants writing comparable coverage at a lower price tag coupled with the lack of severity leads Bregman to predict that “rate increases are going to be muted. The big guys are going to be trying to get rate, but I’d like to be 6’4,” blonde and blue-eyed and play center field for the New York Yankees. Just because I want it to happen doesn’t mean it’s going to happen.”
Jacquelyn Connelly is IA senior editor.