Directors and officers liability insurance rates continued to rise at July 1 but in smaller increments than in recent renewals, and many experts believe rates may be flat by this time next year.
New capacity entering the D&O sector has relieved some of the upward pressure on rates, although for now it is focused on excess layers, experts say.
Problematic areas in the D&O sector include coverage for “de-SPAC” transactions, when there is a merger between a private operating company and a publicly traded special purpose acquisition vehicle, and fiduciary litigation associated with alleged high fees.
“The entire broker market saw rate increases for almost every single one of their clients” last year, with the market peaking in the second quarter of 2020, said Seth Pfalzer, senior vice president and partner at Woodruff Sawyer & Co. in San Francisco.
The worst of the hard market may be over, said John M. Orr, D&O liability product leader for Willis Towers Watson PLC in San Francisco.
Looking ahead, competitive pressures are increasing and while rate increases will continue, there is likely to be more flat renewals and potentially more frequent rate decreases, he said.
“We are going to see increased competition, I think, over the next 12 months,” said Matthew McLellan, Washington-based senior vice president and D&O product leader for Marsh LLC.
“By this time next year, I think things will have greatly settled down” in the public D&O market, said Peter Taffae, a D&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc
Carnell Jones, Chicago-based risk program manager for Interpark Holdings LLC, which owns parking facilities, said last year his company had a 34% increase, but returned to about a 1% increase during July 2021 renewals.
“We were one of the lucky ones,” he said, adding that renewing with its incumbent insurer, the Hanover Insurance Group, may have helped.
There have been about a dozen new entrants into the management liability market in the United States and London.
The new capacity has led to rate moderation, particularly in the excess market, where it has helped fill gaps, Mr. Orr said.
While much of the new capacity has focused on excess layers “at some point, those markets are going to need to grow,” which will mean their moving further down the tower and closer to the primary layers, said Andrew Jarousse, executive vice president, executive lines, for Risk Placement Services Inc., the Rolling Meadows, Illinois-based wholesale broking and managing general agent unit of Arthur J. Gallagher & Co.
Meanwhile, de-SPAC D&O rates are increasing. While the SEC’s interest in this area has slowed SPAC activity, higher retentions, higher scrutiny and hard market pricing will continue to occur in the foreseeable future, Mr. Orr said.
With the nontraditional IPO process used by SPACs, including numerous sponsors competing for target companies, there “are more moving pieces” to be found than in traditional D&O renewals, he said.
Underwriters require information on a SPAC’s backers and review the merits of the deals, so there is more underwriting involved and pricing has increased, Mr. Jarousse said.
Insurers are seeking to exclude prior acts coverage for SPACs, which do not have the many months of preparation to go public afforded traditional initial public offerings, said Devin Beresheim, New York-based executive vice president, specialties practices, with Lockton Cos. LLC.
Another issue facing the D&O market is fiduciary excess fee litigation, where the number of lawsuits has increased dramatically. These are class actions brought against defined contribution retirement plans in connection with allegations that recordkeeping and other expenses that they charge are unnecessary or unreasonable.
“What was the sleepiest kind of coverage in the management liability space” has now become one clients need to be forewarned about, said Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC.
Insurers are seeking higher premium and significantly higher retentions, he said.
Meanwhile, the full extent of the effect of COVID-19 on the D&O market “is still to be played out,” said Wayne Imrie, D&O focus group leader in the London market for Beazley PLC.
Litigation is aimed at industries where the pandemic has had a knock-on effect, he said.
“As we begin to exit the pandemic and lockdown environment and return to normal, what that will look like” from a D&O litigation perspective is “yet to be proven.”