3 Reasons Why We Expect the D&O Market to Harden

By: | January 9, 2019 • 3 min read
Phil Norton is the Senior Managing Director of the Management Liability Practice at Arthur J. Gallagher & Co., and is regarded as one of the world’s leading authorities in his field. He has been named a Risk and Insurance® Power Broker® seven times. He can be reached at [email protected]
Topics: Risk Insider

There are many elements that come together in a perfect storm when major changes occur, and the developments behind a harder D&O market for 2019 are no exception — there is a lot of disruption in the marketplace, especially with respect to claim patterns; this has carriers on edge.

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Our most reliable indicator of market movements is changes to the annual count of securities class actions (SCAs). SCAs have rocketed upward  — as shown on the graph below — for a number of reasons. The annual claim counts shown for 2016, 2017 and 2018 exceed all years of the post-1995 modern period, except 2001 and 2002 (incidentally being the key years for the last big hard market for D&O). Note also when reviewing the SCA Claims chart that normal expectations have been for SCAs in the range of ~200 per year, as the 2002-2016 average was 195 claims per year.

Driving the aberration years of 2017-18 are many factors, some viewed as highly problematic, whereby we may need Congress versus the courts to slow claim cost trends as respects IPOs or M&A litigation. Here is a summary of a few items to consider:

1) M&A related claims have shifted and their claim costs are higher than anticipated.

  • The shift has been for more Federal claims versus state court actions that were prevalent before the 2016 Trulia decision in the Delaware Chancery Court.
  • Claims costs for “typical” settlements of M&A disclosure only issues are ~$2M for the settlement portion but matched by another $2M in plaintiff attorney costs before we add about ~$1M for defense costs. Some of this data is courtesy of Chubb, which has been researching why these “minor” claims have been so costly in total. The good news is that many such claims are still dismissed, resulting in defense costs only.
  • The bad news is a few M&A claims have blown up into dramatic claims stories, such as two of the largest derivative actions (Activision Blizzard and Freeport-McMoRan)

2) Event-driven claims are a new category brought primarily by “emerging” D&O plaintiff firms.

  • Such claims focus on operational issues, such as Arconic’s cladding of the Grenfell Tower, Anadarko’s shutting down 300 wells after an explosion or Caterpillar’s overseas tax strategy coming into question. The emerging plaintiff group represents more than 40 percent of SCAs today — just 12 years after entering the D&O claims arena. They tend to have smaller average settlements but against smaller than average companies and with larger than average defense costs associated with their claims.

3) D&O claims for cyber breaches and EPL events (sexual harassment or discrimination) are rising.

  • More than a dozen new claims about cyber security mismanagement are sometimes becoming costly (e.g., Yahoo! and a $80M settlement).
  • More than a dozen #MeToo-oriented claims have settled for big numbers as well, with recent settlements including $90M involving Twenty-First Century Fox.
  • Some events are morphing into Derivative Actions or other “Side-A” claims against the individual directors and officers, including the Fox claim as well as another 10+ claims with settlements in excess of $60M.
  • The recent Cyan decision allows alleged violations of The 1933 Act (think IPOs) to be brought in either federal or state courts (or both) and suggest large defense costs to defend.
  • D&O prices have headed down for most publicly traded companies for several years in a row in part due to new capacity over the last 5 years and reasonable profits until 2016 or 2017. Now both new and old capacity are being run over by claim costs without sufficient premium to break even.

In short, two trains running on parallel tracks have recently turned to face each other and now are accelerating at each other for a collision unless one or the other moves. The trains are D&O premium costs and D&O claims costs, and their collision is a hard market that has gently begun in the U.S. with small increases being demanded for some very good accounts. &

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]