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CLIENT UPDATE: A D&O MARKET IN TRANSITION

10/31/2018

 

For the last several years a growing contingent of D&O insurers have complained that the rate environment is not adequate and that premium increases are necessary to sustain a healthy market. Despite their rhetoric, often timed in conjunction with the preparation of their annual budgets for the upcoming year, underwriters quickly abandoned any real attempts at premium increases in the face of abundant capacity with one or more other insurers ready to step into their spot on any particular program. As 2018 winds down the environment is changing, and for some insurance buyers with 3rd and 4th quarter renewals, it has changed significantly.

 

The market is transitioning from one of declining rates over the last 10+ years to one of modest to moderately increasing rates (in most cases we expect this to mean 10% or less). Accounts that underwriters categorize “high risk” should expect to pay significantly more (and restructuring of limits and retention may be required).  While much of the focus today is on primary layers, pricing of excess layers is also being impacted, in particular low and first excess layers where carriers are looking to move their excess factors back into the 70% range.

 

Are higher rates generally justified? The following facts are frequently cited by underwriters:

 

·         Significant premium reduction over the past 14 years

      While the 2004 pricing highs deserved reductions, abundant capacity maintained a soft pricing cycle 5-7 years longer than results would have indicated was prudent

·         Broadening of the insurance contracts

      Coverage overall has been broadened and certain features (i.e. Shareholder Derivative Demand Costs) have led to the carriers paying more and paying faster

·         Declining premium base

      There are 35% less public companies in 2017 than 2000 

      IPO market has not kept up with M&A transactions (and IPOs are loss leaders for most insurers)

·         Record number of securities class action filings in each of the last two years (inventory of cases was 785 at YE 2017)

      Not enough premium to pay for prior years’ claim development assuming historic claim dismissal rates and settlement values

·         Litigation costs at an all-time high

 

While these are real trends, many of them have been going on for a number of  years.  Why then are we starting to see stickiness in the rate environment now?

 

1.      Insurer consolidation has slightly reduced capacity

2.      With few primary players, desire to write more primary business has subsided (many primary carriers want more mid-high excess to balance their book)

3.      Newer market entrants are either staying conservative, or in some cases retrenching

4.      Insurers talking more and more about profitability and less about growth and budgets

5.      Insurers willing to walk away

 

Ancillary management liability lines (fiduciary, employment practices, crime) are also being impacted, but to a lesser extent. Underwriters are reconsidering large blocks of capacity,  requiring higher retentions in some cases, and requesting more information about the underlying risks.  The cyber marketplace is an anomaly for the moment, with abundant and growing capacity and more premium decreases than increases so far this year.

 

The good news is that the team at McGriff is familiar with a firming market; we have the experience, creativity and relationships to differentiate your risk and ensure that coverage is not forsaken (trading coverage and retentions for relatively small premium dollars may not make sense in the long run). An early start and strategic approach can make a meaningful difference.  We know that surprises are not a good thing and pledge to communicate early and often during this cycle.

 

More information is included HERE of a recent Lunch & Learn we hosted on this topic in our Houston office. We invited several local underwriters to participate in that discussion. Please let us know if you would like additional information, have any questions or if you prefer to be removed from future distributions.