Rates are likely to rise for many lines of insurance in 2019, and management liability is no different. In the year ahead, the management liability market will be “stable, but firming,” said Keith Riccio, Vice President, Management Liability and Specialty, Nationwide.
On average, companies can expect to see 10 to 20 percent increases in D&O pricing at renewal, which Riccio said is “significant, but warranted” given prolonged soft market conditions amid growing loss frequency and severity.
“If you compare the D&O market five years ago to today, it’s safe to say anywhere from 20 to 30 percent of premium has been taken out of the market,” Riccio said. D&O losses are reaching record levels thanks largely to the growing number of recent securities class actions.
“Securities class action frequency is at an all-time high for the past three years,” Riccio said. “In 2018, the total was up 200 percent from the 10-year annual average between 1997 and 2017, according to Cornerstone Research’s latest report on securities class action filings.”
That increase is being driven by these nine factors — some of which companies and their insurers have never had to contend with before:
Dramatic fluctuations in stock value tend to give rise to securities class actions by dissatisfied shareholders. In 2018, Wall Street experienced more highs and lows than in any prior year since the recession of 2008. Compounding the issue is that more law firms are capitalizing on the volatility by making securities litigation a core part of their business.
According to Cornerstone’s “Securities Class Action Filings, 2018 Year in Review,” a high number of IPOs in 2017 and 2018 have also contributed to more frequent securities filings. With 134 IPOs, 2018 was above the 2001-2011 average of 99 IPOs per year but remained well below the 1997-2000 average of 403 IPOs per year.
“Stocks offered in an initial public offering are more vulnerable to market volatility,” Riccio said. Going public during a downturn can immediately negatively affect stock value, disappoint investor expectations, and draw a lawsuit.
Though the total number of mergers and acquisitions dropped slightly in 2018 over 2017, the trend of consolidation is still strong. Deal value also increased. Global M&A deals made through the first three quarters of 2018 were worth nearly $3.3 trillion, a 39 percent increase over 2017.
“Any time you have a merger or acquisition, there’s a chance you’ll see what’s called a ‘bump-up’ or merger-related lawsuit,” Riccio said. “That inflates the total class action number.”
According to Bloomberg Law, 204 new securities class actions were filed in first half of 2018, and more than 45 percent of them were merger-related.
Companies are increasingly facing liability action over catastrophic events. After the destructive wildfires that wrought havoc across California in 2017, for example, utility companies are facing allegations that their equipment played a role in sparking the flames.
“Energy companies have seen D&O claims arising out of their potential involvement in starting these fires,” Riccio said. “Events like this traditionally would not be perceived as a D&O exposure. It’s a new market dynamic leading to an increase in securities class actions, which is leading to increased losses in a market that hasn’t priced for it.”
Securities class actions related to data breaches are growing more common and costly. “We’re starting to see D&O claims arise from data breaches and failure to disclose appropriately to the market information regarding any breach an organization suffered,” Riccio said.
Plaintiffs’ attorneys are quick to file suit on behalf of shareholders based on significant drops in stock value following the disclosure of a breach, and on allegations of misrepresentation in SEC filings regarding the strength of their cyber security prior to the breach.
In a recent high-profile case, Yahoo paid $80 million in September of 2018 to settle a securities class action alleging that the company repeatedly misled investors after four separate data breaches that affected as many as 5 billion accounts. Over the course of 2018, at least nine such actions have been filed against public companies related to a data breach.
Class actions may arise from allegations of sexual harassment against senior executives of a company but will target the entire board of directors over how they handle the situation. Lack of adequate disclosure about the incident or an insufficient response can hurt the company’s stock value and ultimately be fodder for a securities class action.
Plaintiffs can also allege that the company misled investors by not disclosing patterns of misconduct committed by senior executives and failed to acknowledge the negative impact of misconduct on the company’s reputation, legal liability exposure, and overall ability to operate. If company assets were used to make confidential settlements with accusers, then allegations can also include breach of fiduciary duty.
Social media adds fuel to the flame when it comes to many emerging sources of D&O exposure. The #MeToo movement, for example, has made accusations of sexual harassment front page news. Anger over incidents like data breaches or supposed liability for natural disasters can build and spread faster.
When negative news travels farther and lingers longer, it prolongs the impact of any negative event on a company’s stock price, sparks calls for further investigation, and may attract the attention of attorneys looking for a deep-pocketed target.
“Social media has played a role in giving rise to securities class actions that 10 years ago would not have been filed, simply because it creates an extended period of negative press that companies have a harder time coming out of unscathed,” Riccio said.
In the case of Cyan Inc. v. Beaver County Employees Retirement Fund, the Supreme Court ruled early last year that securities plaintiffs could bring class actions against companies under the Securities Act of 1933 in in state courts.
“Prior to this decision if you had a securities claim in state court and federal court alleging breaches of the ’33 Act, they would be consolidated and move forward only in one jurisdiction. The Cyan decision says that the company cannot remove the state court lawsuit to federal court, even if there’s a parallel or identical federal court action. So that permits the lawsuits in state court and in federal court, with the same sets of allegations and facts, to go on side by side,” Riccio said.
“That’s causing more defense costs to be incurred on behalf of the company that’s being sued, and that’s causing more liability to the D&O marketplace because those defense costs may be picked up by a D&O insurance policy.”
Because it’s unregulated and its value swings so wildly, companies investing in cryptocurrencies are very vulnerable to securities litigation.
“The cryptocurrency marketplace has been extremely volatile, which has led to a lot of D&O litigation in that space,” Riccio said. “Any time you have a new unregulated investment vehicle, it’s just ripe for manipulation and corruption, and for people to get taken advantage of.”
Most cryptocurrency purveyors that go public with initial coin offerings — or ICOs — have been hit with a securities class action. Through the first half of 2018, at least 12 ICO-related actions were filed.
Rising liability verdicts and settlements reaching into the multimillion- and even billion-dollar range also enhance D&O exposure.
“Any asset is fair game when you have a mega liability settlement, and that includes D&O insurance, whether the allegation is related to mismanagement or not. Plaintiffs’ attorneys will look for dollars wherever they can,” Ricco said.
During this time of historic volatility and rapidly emerging exposure, companies absolutely need stability in their D&O carrier.
“We’ve been in the D&O market for more than 10 years and are committed to the space; we’re A+ rated, and we’re stable,” Riccio said. “Even with rising securities class action frequency and increased loss costs, we strive for a price point that is fair to both sides.”
Companies can trust in that statement because, as a mutual company, Nationwide’s fiduciary duty is to its insured members, rather than shareholders. “Our obligation is to our members, so we work hard to truly partner with them,” Riccio said.
That mission includes providing a suite of both primary and excess products for companies of every size in any sector, so a solution exists for every member. A partnership philosophy also extends to the claims approach.
“We handle all claims in-house, and we have a tremendous expertise on that side of the house. Our claims professionals work closely with underwriters in order to adjudicate as quickly as possible. We’re always looking out for members’ best interests,” Riccio said.
As professional liability risk becomes more prominent and more unpredictable, carrier stability and commitment will be critical characteristics as the market adapts.
To learn more about Nationwide’s Commercial Liability risk management products and services, visit https://mls.nationwideexcessandsurplus.com/fs/products/directors-and-officers-liability/commercial-d&o/ or contact Keith Riccio, vice president, at 1-212-329-6923 or [email protected]
Speak with your agent or broker about specific policy details and coverages. Consult your policy’s terms and conditions for specific coverage information.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Nationwide. The editorial staff of Risk & Insurance had no role in its preparation.
In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.
He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.
Now he was ready to make his mark on the business world.
Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.
Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.
This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.
In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.
R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?
Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.
When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.
I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.
We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.
R&I: So Starr’s success has meant success for the Chinese insurance industry as well.
Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.
“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.
Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.
We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.
On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.
R&I: What’s your outlook on current trade relations between the U.S. and China?
Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.
President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.
R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.
Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.
They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.
R&I: What stands in the way of that happening?
Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.
For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.
The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”
So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.
R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.
Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.
R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?
Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.
It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.
R&I: Your op-ed was very enlightening on that topic.
Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.
R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?
Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.
R&I: And that’s because you are a private company?
Hank Greenberg: Yes. We attract a different type of person in a private company.
R&I: Do you think that enables you to react more quickly?
Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.
“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.
R&I: You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.
Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.
R&I: And that fateful decision the AIG board made really affected the course of the country.
Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.
From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.
R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.
In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.
Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.
Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.
R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?
Hank Greenberg: We did something last week.
On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.
Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.
R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.
Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.
R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?
Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.
How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.
More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.
One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.
So, change is inevitable. You need people who can deal with change.
R&I: Is there anything else, Mr. Greenberg, you want to comment on?
Hank Greenberg: I think I’ve covered it. &