November 24, 2020
In this blog we examine the current market conditions and how best to navigate Directors & Officers Liability (D&O)
Overview
Buyers of Directors & Officers Liability (D&O) Insurance should be aware that pricing continues to increase, limits may be further reduced, retentions increased, and some coverage extensions may be removed at renewal.
COVID-19 financial challenges has been the tipping point for D&O insurers. This comes after years of price decreases and increasing frequency and severity of claims – both of which negatively affected insurer loss ratios. These market trends over the past several years, meant we were in a buyers’ market, or a “soft market” for D&O insurance.
Now we’re in a sellers’ market or “a hard market” and while this is especially complex for some firms and market verticals, the overall impact is being seen on virtually all D&O renewals.
As we stated in our last D&O blog, buyers can be experiencing double-digit rate increases. This has been due in part to the rise in class action claims against public companies, the #MeToo movement and ensuing lawsuits and the growth of “event-based litigation” arising from catastrophic claims.
Complicating this situation is that insurers are looking to manage their risk tolerance and may be reducing their limits: so a $10 million layer, may be reduced to $5 million at renewal, while a $5 million layer of insurance may be reduced to $3 million. This means that additional insurers may be needed to fill your D&O insurance needs, during this sellers’ market, and excess carriers are demanding substantially higher rates- than previously charged.
Industries experiencing the most pressure include financial services, healthcare, hospitality, real estate, retail, biopharma, technology, entertainment, and transportation.
What to do to navigate this new reality
Successful mitigation strategies start with beginning the renewal process early and addressing, in detail, insurers’ potential concerns as to your liquidity and profitability.
Looking toward renewal you might consider:
- Alternative structures
- Higher retentions
- Quota share limits where 2 or more carriers share proportionally in a layer of coverage
- Combining D&O and other related lines of insurance (E&O, Fiduciary, etc.)
- and/or replacing some traditional D&O insurance with A-Side only coverage. Note: this last strategy has potential long-term drawbacks
- Examine which terms and conditions are most important to your firm, if necessary, where coverage may be scaled back; and be ready/willing to look at alternative insurance carriers.
- Work with your experienced D&O specialist (early) on your renewal and any budgeting concerns you may have for 2021. Starting your Renewal Process 90-120 days in advance.
What to expect in the future
As we’ve been sharing, insurers are prepared to write fewer D&O policies and charge more while narrowing coverage in 2020. For buyers of D&O insurance, it’s becoming harder to negotiate as insurers are willing to walk away. This means that where you have strong carrier relationships, it’s time to utilize this “asset.”
In the coming year, we expect the hard market to continue and for pricing to rise even further.
On average, public companies buying D&O insurance will likely receive total price increases in the 50% to 200% range, or more (with 50% minimum increases on the primary layer and with smaller increases on the excess). Private companies should expect 25% to 100% increases, or more.
“Similar to what has occurred with other lines of insurance coverage, the COVID-19 pandemic has led to a great deal of uncertainty and conjecture on the [part of] writers of D&O insurance. It is likely that the COVID-19 pandemic will ultimately lead to greater complexity regarding emerging D&O claims and litigation issues.”
- AM Best, Directors and Officers Insurance Facing Seismic Shift
LEARN MORE
Navigating a Hard Property & Casualty Market Cycle
COVID-19 Opens New Road Forward for Retailers
Adapting Resilient Design to a Pandemic
CONTACT US:
Neil C. Krauter Sr.
Management Liability Practice
P: (212) 596-3401
E: NKrauter@krautergroup.com
Donovan Nowell
Management Liability Practice
P: 212-596-3456
E: DNowell@risk-strategies.com
Bill Holden
Management Liability Practice
P: 650-227-7240
E: BHolden@risk-strategies.com
The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.