Risk & Insurance® recently sat down with Thomas Kocaj, QBE North America’s head of management liability, to discuss macro trends in D&O, E&O and EPLI, as well as external factors like interest rates and inflation, noncompetes and rising litigation.

What follows is a transcript of that conversation, edited for length and clarity.

Risk & Insurance: Could you describe for me your areas of priority — what is your overarching goal that you’ve been focusing on recently?

Tom Kocaj: I lead QBE North America’s management liability practice, a business made up of three segments: public company management liability, private company management liability and financial institutions. And within each of those segments, we’re writing D&O, EPL, fiduciary and fidelity bond. And then in financial institutions, we also write E&O products like bankers professional and asset manager E&O.

R&I: It’s been an interesting few years for this space — can you put them into the perspective of some of the macro trends that you’re seeing?

TK: We’ve had economic conditions that have been challenging over the last few years, driven mostly by rising interest rates and inflation. We had a significant slowdown of the M&A markets in 2022. In 2023, the markets started to recover, and they’re continuing to recover a little more this year.

Yet in management liability, in particular public company D&O, we are seeing ongoing soft market conditions. It’s very, very competitive. Comparatively, financial institutions and private company, while still competitive, are a bit more stable.

In financial institutions, for example, you have the E&O product, which can be a little bit of a differentiator; it narrows the number of competitors when you can quote primary E&O.

In private company, you have some tougher industry segments. Perhaps it’s the EPL product that can give some people pause, which again creates a little bit of a differentiator.

In public company, while 2024 is showing some signs of stability — maybe at the end of 2023, it started to stabilize a little bit as well, [at least] relative to 2022 and most of 2023 — it’s really a very price-driven market, and there’s a lot of new capacity still in that market, presumably chasing new business goals. So outside of relationships that you might have with the broker and customer, and your ability to quote primary, it’s harder to differentiate yourself. And I think that’s why that market is more competitive.

R&I: What about changes due to outside factors like trends in litigation or regulation?

TK: From a litigation standpoint, in management liability, our barometer is generally securities class action claims. They tend to be the most severe claims we experience. You can have a very large E&O claim as well, but that’s going to be limited to the financial institutions space; it’s not in public or private. So the securities claims in public company D&O and financial institutions are our barometer.

We saw a big surge of claims from 2016 to 2019 that drove the hard market of 2020 and 2021. There was a little bit of a breather during COVID, due to the backlog of older claims and more limited legal activity. But as we moved into 2022 and 2023, securities claims activity came back up.

I think 2022 and 2023 were very similar years, with respect to securities claims activity, and I think 2024 is probably projected to be another similar year. And what we’re noticing that’s a bit different is we’re seeing further look-back periods. In other words, it’s not necessarily two months after the stock drop where we’re seeing the claim. It could be 17 months later.

So, we’re seeing claims look back further, and we feel that while plaintiffs were busy with the inventory of claims from 2016 to 2019, they knew they had some time to get to the more recent stock drop events and bring those to litigation. And we think that’s happening now.

That’s all a way of saying that we find it a little surprising to see as much competition as we do in the public space, knowing that there’s the old inventory of claims and there’s a new inventory continuing to build. It’s a little bit of a surprise to me to see the market as competitive as it is.

R&I: You already touched on rising interest rates having an impact. What effect is that having on private companies?

TK: Well, I’ll start with debt refinancing. Companies won’t have as easy of an opportunity to refinance their debt between now and 2026 as they did five years ago or so, because of the rise in interest rates.

The question then becomes, how much cash do they have on hand to service that debt? How successful have they been in growing their revenues and ultimately driving a profit?

If you have a more established company, chances are they either have the cash on their balance sheet to service the debt, or they have an operational history that might make refinancing easier for them, or at least give them a few more options.

Mostly where you’re going to see problems is around newer companies. There are a lot of technology companies that may still be developing their product, customer base and revenue streams, and ultimately still striving to become profitable. And maybe they haven’t gotten there yet; cash they have from earlier rounds of funding might be drying up because they’ve been burning cash each month. So those are the companies I think you’re going to see struggling more.

The bottom line is, you need to have the cash to pay the bills, especially if you’re not able to find attractive terms for refinancing.

At the same time, we’re also seeing high inflation. You’ve got increasing wages now, and also an increase in the cost of goods sold. That’s obviously another driver of potential stress for any company. There have been some bankruptcies.

I can’t say that we’ve gotten to a point with inflation where we’re seeing widespread distress, but we’re certainly seeing individual cases. Lately, inflation has come down — it’s not down all the way, but it’s come down. So maybe they’re starting to feel some relief there. That’s something to watch as we continue to move forward.

R&I: Commercial real estate has been affected by the rise of work-from-home employees following the pandemic. Home sales have also slowed as interest rates have gone up. What effect is this having on financial institutions with portfolios in real estate?

TK: Commercial real estate office space predominantly affects banks and asset managers. The key here is diversification. If you are highly concentrated in that space as an investment fund, you might see poor returns. That could potentially drive litigation from customers.

Similarly, if a bank is not diversified in its loan portfolio, it might start to see larger write‑downs that have an impact on their financial results because they’re overconcentrated in a particular area.

If you’re larger and more diversified, a challenged segment is not going to have as much of an impact, and it might be something that you can just wind down or write down. In the grand scheme, it won’t have a significant impact on your overall business.

A reduction in home loans is going to reduce the size of a loan portfolio of a bank, so they’re going to generate less interest income. At the same time, they’re paying out more for their deposits because of the higher interest rates. And so that could create some challenges, but again, it boils down to diversification, in this case, through other sources of income.

We haven’t really seen the job market collapse, so if you think about the typical homeowner, they’re locked into a reasonable interest rate and able to make monthly payments, even though there are fewer housing transactions. It’s a matter of trying to find ways to replace that interest income, rather than there being a significant issue of default in the home loan space.

R&I: The FTC recently introduced regulation limited noncompete clauses. What effect do you expect to see that have for your clients in the insurance space itself?

TK: At this point, it’s too early to tell what kind of litigation might come out of the elimination of non-compete agreements. It’s interesting to me because this creates the opportunity to have more people move around the industry and easily transition from one company to their competitor.

But there’s still the potential that this same person has a non-solicit in their contract. So, while they might be able to seamlessly jump to a competitor, they won’t necessarily be able to solicit their former employer’s business.

However, our customers typically buy insurance in a tower where there are several layers. A smaller tower might be five layers of $5 million each. A bigger tower could be $500 million.

In that scenario, you could see the non-compete go away and an underwriter moving to the competitor, and even though you might still have a non-solicit, there could be several other layers on the tower that they’re able to target besides that of their former employer.

So, at this point, it’s hard to say what’s going to come out of it other than, in my opinion, I think you’re going to see more people moving around more freely.

R&I: We’ve talked about challenges facing the insurance industry. What’s the biggest issue that’s not on anyone’s radar yet?

TK: I think what we’re seeing a lot across the industry is a potential knowledge gap. And it’s important to acknowledge how essential it is to have proper succession planning and knowledge transfer strategies in place to mitigate risk.

In 2020 and 2021, we saw a lot of new capacity come into the market. A lot of underwriters with less experience were hired into leadership positions. So we were in a hard market that saw a lot of demand, but then suddenly, with the new capacity, it softened. With COVID and new ways of hybrid working, the transfer of knowledge became more challenging. And in the market, there may have been more of a focus on pricing versus other important underwriting fundamentals.

So, there’s obviously a bit of concern that you potentially have a lot of underwriters with limited experience in more senior roles, due to the surge of new capacity into the market, who are now influencing and leading their teams.

When you think about the fundamentals of the insurance business — relationships, claims, coverage, pricing — and if your main weapon or tool has been price, I’m a little concerned about the lack of knowledge transfer around the other underwriting fundamentals to less-experienced underwriters who will be the leaders of the future. So I think succession planning is a potential issue. &