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The D&O Hard Market Is History as Conditions Improve

As capacity returns and rate increases decelerate, D&O market conditions have improved. However, agents need to remain diligent.
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the d&o hard market is history, but challenges continue to slow the transition

After 15 years in a soft market, the directors & officers insurance market briefly entered a tough period of increasing rates, lower capacity and reduced competition. Fortunately, that was short-lived.

Today, D&O market conditions have improved, with clients able to find higher limits at cheaper prices as capacity returns to the market and rate increases decelerate. 

D&O liability pricing fell 14.7% in the third quarter of 2022, according to Aon's Financial Services Group Q3 2022 pricing index survey. This decrease represents the second quarter of year over year price decreases following a period of 17 quarterly pricing increases over the prior four years, according to the report. 

“The D&O market seems to be transitioning back to a softer, more competitive dynamic after a period of three to five years—depending on the segment—of a harder market," says Mark Azzolino, head of management liability, The Hartford. “There are a few reasons for this, not the least of which is the impact of a few successive years of rate increases and capacity management leading to improved financial results for many carriers."

Several factors adversely impacted the D&O market over the past three years, leading to the hardening of the market. Uncertainty over the impact of the coronavirus pandemic led to fears of a huge wave of COVID-19-related securities litigation; increased exposures from environmental, social and corporate governance (ESG) issues; heightening sensitivity to diversity, equity and inclusion (DE&I) in the workplace; and a surge in special purpose acquisition company (SPAC) activity.

After the COVID-19 shutdown, economic factors and adverse D&O loss trends caused the market to harden by the second quarter of 2020 as every aspect of D&O placements was impacted: premium, retention, deployed capacity, excess attachment decisions and terms and conditions, according to Arthur J. Gallagher & Co. 

But while the number of COVID-19-related D&O cases has been significant, fears of a huge wave of COVID-19-related litigation have not borne out, according to a report by global brokerage firm Woodruff Sawyer.

When it comes to SPACs, “that was a bubble," says Jim Rizzo, executive risk underwriter, Beazley. “There was an unprecedented amount of stock offerings that began in 2019 that continued well into last year. Then there were a lot of de-SPAC transactions which underperformed, coupled with increased Securities and Exchange Commission scrutiny—which resulted in a market slowdown—and shareholder scrutiny over these transactions."

“As we entered late 2021, we noted that the rate and retention increases became less dramatic, except in certain industries or for risks with specific issues, such as claims," says Patrick Mitchell, executive risks lead, Coalition Inc. “We also saw new carriers enter the market."

Nevertheless, economic volatility “brought new challenges this year, with limited capital market activity, poor public market performance, inflationary factors partially attributable to supply chain issues, and global conflicts, overlayed with the entrance of many new capital funding startup carriers," says Ziad Kubursi, head of financial and executive liability, The Hartford.

Consequently, “we are seeing less D&O programs go to market, creating more competition on fewer accounts with many carriers looking to mitigate the erosion of their portfolios that have seen two years of strong growth and low claims activity attributable in part to courts clearing up backlogs from court shutdowns during the pandemic," Kubursi says.

Yet, the current D&O landscape remains dynamic, and agents need to remain diligent when working with clients seeking coverage.

“There are still many carrier options in the market today, so agents should ensure they're getting quotes from at least a few different carriers," Mitchell says. “Depending on the risk type, there are many wholesale agencies with access to markets that focus on harder-to-place business." 

Additionally, “agents should work with clients to ensure they have adequate capacity limits, management and benchmarking," Rizzo says. “Agents are able to share the frequency and severity of historic matters for their industry class and benchmark them with similar companies, advising clients on what they should be buying." 

If an agent is working with a company that has a prior D&O claim, “it's important to let the underwriter know what steps the company has taken to ensure that similar claims are unlikely, as well as other risk mitigation practices," Mitchell says. “Providing an underwriter with information on how a claim was effectively remediated can help turn a declination into a quote."

Olivia Overman is IA content editor.

Monday, November 28, 2022
Big I Markets