D&O Price Hikes the New Norm? As Plantiffs’ Attorneys Encourage Class Actions, Buyers Face a Hardening Market

With class-action suits sending exposures soaring, D&O insurance premiums jumped more than 20% this year — but according to carriers, this is just the start.

By: Antony Ireland | September 18, 2019

Topics: Future of Insurance | Insurance Industry | September 2019 Issue

It’s official: Buyers of directors and officers (D&O) insurance should brace for a hard market. After more than a decade of steady rate declines, and escalating claims and management liability exposures, insurers have closed ranks and declared “enough is enough.”

As well as raising rates, carriers are tightening capacity on challenging parts of their books, raising retentions, reducing limits and in some cases, turning down business for the first time in years.

“Some carriers are coming out of the gate with increases of 30% on renewals where the client has had no losses in the previous year, no merger and acquisition (M&A), and the policy is exactly the same,” said Rob Yellen, executive vice president, FINEX, North America for Willis Towers Watson.

“No insurer wants to step out of line, and as long as they stay in lock-step, rates will continue to rise.”

According to Brady Head, AIG’s North American head of management liability, insurers are refusing to quote on some new and renewal business, and “in some very high-risk areas, we’ve seen lead limits come down to $2.5 million, which we haven’t seen since the last hard market.”

One driver spooking carriers is the dramatic rise in securities class actions, which are at their highest levels in the U.S. since the .com crash, with 441 new cases in 2018, according to consulting firm Nero.

Loss severity is also on the rise. According to Cornerstone, settlements in 2018 in the U.S. hit more than $5 billion. This included five “mega settlements” exceeding $100 million and 32 between $10 million and $50 million — a 60% increase year-on-year. And compared to historically low levels in 2017, the median settlement amount more than doubled to $11.3 million.

“With increased claims, increased settlements and a massive inflation in legal defense budgets, we’re starting to see a perfect storm,” said Jim Seymour, principal of Euclid Exec, a D&O managing general underwriter on behalf of AmTrust Financial and Lloyd’s of London.

IPO Costs Escalate

Companies involved in M&A deals and initial public offerings (IPOs) are having a particularly tough time, as plaintiff law firms encourage shareholders to file suits for inadequate consideration and other complaints in the wake of share price volatility.

“Companies doing securities offerings are held to a strict liability on all of their documents and should understand how their activities relate to the areas plaintiffs are attacking,” said Seymour.

Jim Seymour, principal, Euclid Exec

“You can’t stop litigation from happening, but you can defend yourself well at the motion-to-dismiss level by demon-strating good risk management and corporate governance.”

This applies to smaller companies too, which are held to exactly the same standards under securities law, he added.

“The eye of the plaintiff is now directed more on mid-caps — not just blue chips.”

According to Seymour, IPO companies may now struggle to obtain D&O limits over $5 million, even on renewal, while the uptick in merger objections has forced many businesses to insulate themselves with dedicated merger objection deductibles and retentions.

Put simply, said Head, “any company that is going public right now faces a very hard D&O market.”

According to Brian Casey, vice president of Allied World’s North American public D&O division, rates for IPO companies are now “a multiple of what they were two years ago and deductibles are changing dramatically.”

While smaller IPOs are seeing deductibles averaging $5 million to $10 million, larger IPOs can be much higher, he said. “Excess carriers are charging much higher ‘rates on line’ as well,” Casey added.

According to Priya Huskins, senior vice president, management liability for Woodruff Sawyer, the Supreme Court’s March 2018 “Cyan” ruling “added fuel to what was already a hot litigation environment by opening the courthouse doors in all 50 states for registration-related suits.”

And major settlements involving Wells Fargo, Yahoo and others have encouraaged new plaintiffs’ firms.

“One of the big drivers of these larger settlements is the fact that so many suits can and are being brought in plaintiff-friendly state courts as a result of the March 2018 decision in Cyan,” she said.

Special Event Claims

Beyond IPO and M&A activity, this year has already seen a raft of major ‘special event’ claims, from workplace safety and product liability to cyber breaches, #MeToo cases and corruption scandals.

Pacific Gas and Electric Company faces $17 billion in lawsuits and filed for bankruptcy after its equipment was linked to last year’s California wildfires, while Yahoo settled a $29 million suit for not disclosing cyber breaches in a timely manner.

executive vice president, FINEX, North America, Willis Towers Watson

Yellen expects privacy to spur “the next big wave” of D&O claims, with U.S. states already borrowing from the EU’s General Data Protection Regulation (GDPR) approach, putting personal responsibility for data management in the hands of officers.

“If they’re defining how data is being handled, they’re on the hook — and this increasingly applies to U.S. companies, too,” Yellen said, pointing to new legislation passed in California and pending statues in other states. “New York’s pro-posals look even harsher than California’s.”

With 2020 being an election year, corporate leaders will face heightened scrutiny, he added. “Who will be the scapegoat? There’ll be a lot of unfavorable noise about leadership and finance, which just adds fuel to the fire for individual accountability.”

Meanwhile, the internet and social media also make it easier than ever before to access information and unearth potential missteps. “This gives plaintiffs’ attorneys a roadmap from which to bring suits,” said Head.

More Hikes to Come

Against this backdrop, D&O premium hikes of 20% are the new norm.

Yet tech, pharma, biotech and life sciences companies could face much worse, as well as companies in litigious jurisdictions such as California, where suits are rife and settlements high.

Head believes prices will continue to rise for the next couple of years.

“A 20% increase is a very responsible reaction to the market dynamics carriers are facing. It is not, however, enough to solve the ongoing profitability challenge in our marketplace — it’s a good start.”

Casey said the insurance market “has a history of overshooting both to the up and down sides,” and that, with public D&O being one of the more volatile lines, how insurers quantify what these adjustments need to be to the up and down side “will ultimately lead them to success or failure.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.