There is light at the end of the tunnel
The past couple of years have been a wretched time for public companies when it comes to buying directors’ and officers’ liability insurance. As noted in our August 2020 Client Advisory, following several years of poor underwriting results fueled by inadequate rates, as well as a significant increase in the frequency and severity of claims, D&O insurers responded by aggressively seeking significant premium and retention increases and, in many instances, by reducing limits. The market correction actually had its origins in late 2018 but, by the start of 2020, it was abundantly clear that we were in the midst of the hardest market environment in almost 20 years—and the onset of the COVID-19 pandemic only served to accelerate the turmoil in an already deeply distressed D&O insurance market.
Rather than looking back and revisiting the considerable challenges clients faced in 2020, we think it is more constructive to offer thoughts as to our expectations for the future. The D&O market today continues to be difficult, but we see signs on the horizon that the worst of the hard market is behind us. What follows are some of the reasons behind our optimism.
New market entrants and capacity
A relatively large number of insurance carriers and MGAs (such as Applied, Ascot, Balance Partners, Bowhead, Cap Specialty, Convex, Core Specialty, ERS, Inigo, Mosaic, SCOR, Skyward and Vantage) either entered the public company D&O space in 2020 or have publicly announced plans to do so later in 2021. This positive influx of new market capacity has not yet made a meaningful impact on overall market dynamics but, as we proceed further into 2021, we anticipate that this new supply will fuel competition with incumbent carriers, especially on excess layer placements.
Premium increases are beginning to moderate
Our McGriff ERA placement data shows that renewal increases may have hit a high water mark in Q3 2020, and we were pleased to see some moderation in our clients’ Q4 2020 renewal placements. This momentum has carried over to our Q1 2021 renewals and, while it is perhaps a little premature to declare victory over rising rates, it is certainly possible that we will start to see reduced increases, flat renewals or even, in some rare instances, premium reductions in the months ahead.
The “portfolio re-underwriting” is largely over
There is no question, in hindsight, that D&O insurers needed to reset their pricing models, better manage their capacity deployment and encourage clients to have more skin in the game through higher retentions. Most leading D&O insurers have now taken this corrective action across their portfolios and, in most sectors, we do not anticipate future efforts to broadly cut limits and increase retentions.
Some programs are now perceived as being attractively priced
Over the past two years, D&O insurers sought and obtained significant rate increases across their entire books of public company D&O business with little to no regard to the underwriting of a clients’ specific risk profile. We expect that clients with excellent financial and operational performance, strong balance sheets, and superior corporate governance standards will attract considerably more interest from D&O insurers this year in light of the elevated premium rates set in 2020.
Underwriters are beginning to compete for business again
A valid frustration for many clients last year was the lack of choice and alternative carrier options, especially for primary layer placements. Most D&O underwriters shied away from aggressively competing for new business opportunities in 2020, but we see a much more constructive attitude from the market towards our 2021 renewals. Some carriers see this as an opportunity to gain greater market share.
Coverage quality remains robust
As we have moved through this challenging market cycle, perhaps the most positive aspect has been that D&O insurers have made very limited efforts to scale back coverage enhancements that we have carefully negotiated for our clients over the years. Some aspects of coverage are under threat (i.e., reduced sub-limits for costs associated with shareholder derivative and Books and Records demands, changes to Extended Reporting Provisions, elimination of limit reinstatement options on Side A towers, etc.) but, for the most part, D&O insurers continue to provide high-quality coverage solutions.
The pie is getting bigger
Thanks to the explosive growth in Initial Public Offerings and, in particular, Special Purpose Acquisition Corporation (SPAC) IPO activity in 2020 and 2021, and defying a longer-term secular trend, the number of U.S. publicly traded companies has actually become larger, representing significant new business opportunities for D&O insurers. SPACs are currently the topic of the day in the D&O insurance world. While it is too early to tell whether insuring these investment vehicles will ultimately be profitable for D&O underwriters, there is no question that SPAC IPOs and the following de-SPAC transactions have created substantial growth in the overall public company D&O market premium volume.
The impact of COVID-19
While none of us can ignore the human toll and financial impact of the global pandemic, it is fair to suggest that the volume of COVID-related securities litigation filings against U.S. public companies fell short of our initial fears and expectations. So far, there have been only 22 Securities Class Action (SCA) filings that are COVID-19-related, several of which have already been dismissed.
Securities Class Action filings are on the decline
323 companies were named as defendants in federal SCA actions in 2020 versus more than 400 filings in each of the prior three years. The SCA filing rate so far in 2021 promisingly suggests a continuation of this downward trend, with 84 filings made as of April 15.
Federal Forum Provisions (FFP) are being upheld
The 2018 U.S. Supreme Court ruling in Cyan affirmed that Section 11 claims under the Securities Act of 1933 could also be brought in state courts. This led in turn to ’33 Act claims being filed in both federal and state courts and, in response, many companies adopted charter provisions requiring that such future litigation be only brought in federal court. There have now been several favorable rulings (Sciabacucchi, Restoration Robotics, Uber, Dropbox) where courts have supported the validity of federal forum provisions.
While public companies will continue to endure elevated premium costs for their D&O insurance, there is light at the end of the tunnel, and we anticipate an improved trading environment as the year continues.
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