The greatest factor in pushing rates down is the new capacity that came in during the hard market in both the U.S. and London.
The management and professional liability market is improving. There are nuances, of course, depending on product line or jurisdiction, but generally, new capacity continues to drive competition and reduce premiums, with renewals coming in flat or lower. The softening of the directors & officers insurance market, however, has been much steeper, particularly when it comes to public companies.
The average public D&O renewal in the second quarter of 2023 was down 25% to 30%, but there is an important context to these numbers: It is somewhat inflated by the decreases seen by companies that recently went public.
It is not uncommon today to see recent initial public offering (IPO) or de-SPAC—a special purpose acquisition company (SPAC) acquiring a private company—renewals down 50% to 60%, and often with a material drop in retentions. Most of these types of businesses already saw a significant drop in 2022 as well.
This is a reflection of softening market conditions, but it is equally—if not more—of a reflection of how broken the market for companies going public became during the worst of the recent market cycle.
The greatest factor in pushing rates down is the new capacity that came in during the hard market in both the U.S. and London. Another significant factor, however, was the go-public market essentially shutting down in 2022. Most knew that the hard market had peaked in 2021 and likely expected decreases in their renewal book. The hope was that it would be offset by new business from new IPOs and de-SPACs.
However, that did not happen, so it forced underwriters to compete again in a meaningful way for the first time in several years. That is why the first quarter of 2022 saw flat to single-digit average increases on renewals that became average reductions of around 15% by the end of the year. 2023 has largely been a continuation of this trend.
It is doubtful we will ever see 2021's volume of SPAC and de-SPAC transactions again, but the IPO market has been fairly stagnant in 2023 as well. We're hopeful this is finally starting to change, as we have seen a steady pipeline of companies engage in the IPO process and are now simply waiting for the right market conditions to develop to go public.
Looking forward, there is nothing to suggest that this current softening period is going to end any time soon. At some point, these large decreases must bottom out, as large double-digit decreases are not sustainable, but I would not expect a return to the conditions we saw in the last hard market cycle for the foreseeable future.
The reality is that soft rate environments are more the norm, with hard markets being the aberration—at least in public D&O. But it is important to remember that prior to 2018, when things started to firm, public D&O had been in a sustained soft market for over 15 years.
What does this mean for agents? Reductions are great for clients, but these large swings up and down can also undermine credibility with insureds. Unlike other lines, where there is a logical correlation between rates and third-party events, such as hurricanes or fires, that is not as readily apparent for public D&O. If anything, there can be a disconnect between the rhetoric about the risk of securities litigation and the reality that most companies are likely to face.
Rodney Choo is senior vice president, executive lines, at Risk Placement Services (RPS).