State of the Insurance Market Report
2025 Initial Outlook and 2024 Wrap-Up
Private Equity
Management Liability Update
2024 marks the third consecutive year of a softening directors & officers (D&O) market. Pricing pressure has been more pronounced in higher excess layers than lower attachment points spurred by increased capacity following an influx of new market entrants. According to A.M. Best, the direct written premiums (DWP) in 2023 were down 15% and 23% from 2022 and 2021, respectively. We expect DWP to continue to decline for the remainder of 2024.
According to the National Economic Research Associates (NERA) Full-Year 2023 Review, the number of traditional class action filings increased for the first time in three years, and average settlement values continue to rise. Underwriters are cautiously reviewing loss trends and profitability to determine whether this downturn is sustainable into 2025. In addition to class action filings, the D&O market is also exposed to several developing risks outside traditional claims sources, including litigation related to cyber, Environmental, Social and Governance (ESG) practices, climate risks, employment practices, and artificial intelligence (AI).
Private Equity
The mergers and acquisitions (M&A) market was active in 2024, but its rebound from 2023 has been slower than anticipated. According to Ropes & Gray, in the first half of 2024, deal count was tracking down 13% compared to the same period last year. Furthermore, interest rates have remained higher longer than expected limiting access to capital and the ability for buyers to obtain favorable financing.
Although the stock market performed well in the first half of 2024 (with +8% to +16% returns depending on the Index), dealmakers remain cautious amid economic uncertainty, concerns about inflation and monetary policy, and regulatory and geopolitical headwinds.
Dealmakers are also closely watching the ever-changing and increasingly stringent regulations relating to national security, data protection, and ESG. Heightened geopolitical risks in several regions of the world in conjunction with the upcoming elections in the U.S. and UK should be factored into deal decisions. Historically, transaction volumes tend to dip during election seasons.
2024 has seen a great focus on value creation through add-on acquisitions, carve-out deals, take-privates versus new platforms or initial public offering (IPO) activity. Despite a sluggish first half of 2024, dealmakers maintain optimism given the Federal Reserve interest rate cut and high levels of cash reserves. According to Price Waterhouse Coopers (PWC), the global buildup of portfolio companies looking to exit and an estimated $2T in debt maturing in 2024 adds pressure for M&A activity to accelerate in the coming months.
Coverage Considerations
Cryptocurrency Funds
Cryptocurrency-focused asset managers as well as Blockchain and Web3 technology companies continue to face a challenging insurance marketplace. The swings in crypto pricing and ongoing high-profile regulatory battles prevent most insurers from offering favorable terms. Furthermore, a lack of crypto-savvy underwriters and brokers has resulted in many firms accepting insurance policies that do not offer adequate protection.
However, there is light at the end of the tunnel. Venture capital crypto investment deal valuation is in its third quarter of increases after the steep drop from 2022 to 2023. Legislators are working on creating clarity in the digital asset space, exemplified by the U.S. House of Representatives passing the Fit21 Bill. If enacted, the bill would determine when a cryptocurrency is a commodity or a security and thus clearly define oversight to either the Commodity Futures Trading Commission (CFTC) or Securities and Exchange Commission (SEC).
We developed proprietary products to offer comprehensive coverage to cryptocurrency asset managers and their portfolio companies. Our language is crafted to fully cover the unique needs of this industry. We removed cryptocurrency exclusions and limitations on private coin offerings in addition to offering broad regulatory coverage. Our pursuit is to offer clients the broadest coverage at premiums nearer to their non-digital asset peers.
Impact of CrowdStrike Incident
Businesses, governments, and end users globally faced an unprecedented IT outage on July 19, 2024, when CrowdStrike distributed a faulty update to its Falcon Sensor security software that caused widespread problems for Microsoft Windows operators. The disruption and adverse publicity surrounding the incident also caused CrowdStrike’s share price to decline about 30%, representing a market capitalization drop of nearly $12.5B. This has resulted in several securities suits filed brought by investors and airline passengers impacted by the incident. Investors alleged that CrowdStrike failed to both disclose deficient controls for updating the Falcon software and perform adequate software testing before rolling out the Falcon updates which in turn caused significant legal and reputational damage to the company. Airline passengers alleged CrowdStrike’s negligence resulted in significant delays or cancellation of flights causing considerable financial damage to customers. This incident impacted numerous cyber policyholders and further reinforces the need for companies to carry a broad and comprehensive cyber policy that includes coverage for contingent system failure.
AI-Related Concerns
The emergence of AI and its widespread reach is no longer simply a concern for AI developers nor is its exposure limited just to tech errors & omissions (E&O)/cyber claims. Litigation implications directly affecting D&O in all sectors have surfaced with the recent filing of the first AI related Securities Class Action Lawsuit and President Biden’s Executive Order issued in late 2023. As AI-driven cybercrime evolves and regulatory scrutiny surrounding AI practices increases, the insurance market has yet to devise a cohesive approach to address these challenges.
Tips to implement clear governance policies on how AI will be monitored at a corporate level include:
- Develop a clearly defined strategy for integrating AI. Before implementing AI, ensure your data infrastructure can support such initiatives. Invest in technologies like cloud computing, data analytics, and machine learning tools.
- Promote a “security-first” culture by creating internal AI policies and procedures and continuously training employees to ensure enforcement of the same.
- Regularly perform security audits and keep incident response plans current.
- Implement controls to protect the confidentiality of contractually protected information.
- Comply with data privacy regulations and provide options that allow users to delete or protect their information from sharing with third parties.
- Be transparent with customers, employees, and partners about the use of AI or chatbots.
- Update operating software, frequently change passwords, and implement two-factor authentication (if not already in place).
- Establish a board audit or risk committee focused on developing an understanding of how a company uses AI, as well as related privacy, confidentiality, and associated disclosure issues.
- Directors must stay up to date on AI risks and keep these issues front and center at the board level, including consulting with AI experts where appropriate. Boards will want to cite minutes of board meetings showing that AI-related issues were actively considered, but also that the board proactively sought to be informed about AI issues and acted on the information provided as appropriate.
Private Equity Rate ForecastOur rate forecast for the second half of 2024 assumes exposures (assets under management, revenues, assets, employee count) are relatively stable year over year and favorable loss history is: |
||
| D&O Private: |  |
-10% to flat |
| D&O Public: | |
-10% to flat |
| General Partnership Liability (D&O/E&O for private equity/venture capital): | |
-5% to flat |
Take advantage of the softening market conditions via thorough marketing exercises, especially if expansive marketing has not been conducted in recent years.
Use savings from lower insurance rates to either purchase higher limits or additional types of coverage not previously carried.
In a downturn market, we recommend reinvesting in coverage enhancements to expand coverage.
Consider carrier multi-year deals with annual installments and refreshed annual aggregate limits, allowing clients to lock in rates and avoid lengthy underwriting and renewal processes.
Disaster response and evacuation plans will be critical for those in catastrophe zones.
Maintain coverage to protect exposure to investments for financial institutions, especially if your portfolio is underperforming.
Employ strategies to manage the potential pitfalls of continuation fund transactions.
These strategies include a Limited Partner (LP) Advisory Committee to address conflicts of interest, using third-party valuations to set fair asset prices, and emphasizing transparency with LPs regarding terms and conflicts of interest.
You need a private equity-focused insurance broker who understands these implications and your business – a partner with the strategic counsel, intellectual capital, and industry expertise to identify vulnerabilities and liabilities hiding within business opportunities.
Download the Report
Our industry and product line specialists have collaborated to provide an update on current trends and market conditions. We invite you to explore their insights by downloading our latest State of the Insurance Market Report.