The Lowdown on D&O: U.S. Public D&O Market Conditions and What to Expect

By: | September 16, 2022

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

Our forecast for the state of the directors and officers (D&O) marketplace for the rest of 2022 is one of increasing competition at all layers and across industries, leading to significant rate improvements.

Although price increases decelerated throughout 2021, many premium increases were still substantial. However, 2022 jumped off to a favorable start for most public company D&O buyers with many flat renewals and a few price decreases in the first two months of 2022.

But by March of 2022, competition was evident and prices began to fall, often by double digits in the previously more difficult sectors. And by late June, competition was extensive with 20% decreases possible for those companies with either favorable risk factors, or perhaps, are simply paying an unfairly high rate per million for their D&O program, due to the severity of previous years’ increases.

Current State of the Market

The most important questions to ask as we assess the current D&O marketplace for publicly traded companies is, where is the competition coming from and why have D&O carriers shifted their underwriting positions?

Notably, some of the competition is coming from the approximately 20 newer D&O markets playing significant roles in competing against current pricing levels; some of these markets are unique to the UK or Bermuda and may be targeting only a small portion of the U.S. market, but many new ones started focusing on the broad spectrum of U.S. businesses, especially over the last six months.

Perhaps of greater impact, many established markets have shown a greater willingness to quote primary D&O recently. As an example, a publicly traded risk with minor challenges typically obtained three primary quotes a year ago compared to primary D&O quotes available from at least eight different carriers for most of the current renewals.

This competition at the primary level then leads to savings throughout the entire D&O program, as excess prices off of primary rates and those carriers not winning the primary layer then regularly compete for a position in the excess layers of the tower.

So why have carriers chosen to pivot now and go after business? After record premium levels last year, it is not surprising that carriers are looking to continue growing even at a very small level; but with the trend for new listings way down this year, due to fewer IPOs in particular, growth suddenly needs to come from existing businesses.  And since D&O carriers have generally returned to profitability (based on our interviews with executive leaders at the largest D&O Insurance carriers), they are not afraid to compete for business to fuel their growth.

And finally then, to round out the market assessment with the real story behind the story, why have D&O loss ratios improved?

As noted by Cornerstone Research in its 2022 Mid-Year report, frequency of securities class actions has stayed down — at roughly half the peak levels of recent years.

Further, severity appears to be down or mostly stable in all sectors except Communications, which saw multiple massive D&O lawsuits this year. And from our perspective, the highly favorable dismissal rate, continuing to hover near 50%, makes carriers think about getting the retention right but leaves flexibility on premium.

But finally, the litigation background improved dramatically for the IPO sector with the Delaware Supreme Court Sciabacucci decision in March 2020. Simply put, this ruling allows corporations to adopt provisions requiring shareholders to bring Securities Act claims in federal court, thus preventing state court actions known to be more volatile or parallel actions in both state and federal courts known to be quite costly.

Sciabacucci, in effect, counters the Cyan ruling of March 2018, which essentially hardened the IPO D&O market overnight. For more information, take a look at this article: “Federal Forum Provisions Proving to be Valuable in Post-Cyan World.”

What’s Next?

We have found the keys to beating the averages are to start early with your D&O renewal, communicate effectively with underwriters and demonstrate that your company specific risk factors merit more attention at this renewal. Be prepared to talk about ESG, as such issues now have greater carrier interest and could present new claims problems for the future.

And know which carriers favor your business sector. Splashing the entire market with requests for quotes can go very badly, but a focused canvassing of D&O carriers with appetite for your risk has proven to lead to excellent results in 2022.

And don’t forget about quality! The list of denied D&O claims from new carriers with potential policy form problems uncovered at the time of the claim is unfortunately very long. Much diligence is required to safely move carriers. The incumbent usually does have a distinct advantage in part for this reason. Client and broker must review the pros and cons, and then make changes if sensible. Change or not, we are seeing large premium decreases throughout our summer renewals thus far.

As with any good news, some healthy caution is recommended. We believe that despite lower prices, carriers continue to underwrite carefully, with many newer considerations to take into account. Some of these include:

  • Heavier emphasis on environmental, social and governance issues, as noted above.
  • A deep dive into cyber security measures and cyber insurance as relates to D&O concerns
  • Impact from the pandemic, or any potential threats to ongoing business health or expansion

Other concerns from the D&O carrier perspective include:

  • Investment returns, which have diminished substantially this year
  • Inflation, which has ramped up in 2022 and will impact overall costs negatively
  • The remaining backlog of securities claims, that could have a higher than average cost

All the above conclusions aside, carriers still emphasize to us that the client’s risk profile remains the primary variable dictating renewal outcomes. Therefore, expect that the client’s market cap and historical pricing levels, as well as the unique industry, loss experience, location, financial health, communication style and other individual account nuances will continue to have a substantial impact on D&O renewals. &

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