The hopeful start of a more “buyer-friendly” market cycle
In our Spring 2021 Market Outlook report, we speculated that the worst of the hard market was behind us and laid out several reasons to justify our optimism. With the benefit of hindsight, our forecast for an improved trading environment for the balance of the year proved to be correct.
While premium levels certainly remain elevated for the vast majority of clients compared with recent historical norms (i.e., prior to the market correction which began in earnest in late 2018), we have seen a marked and consistent tapering of premium increases this year. And now, many clients with renewals in the fourth quarter are experiencing flat or close to flat pricing, and in some circumstances, even modest premium reductions compared with their 2020 renewals.
Here are some additional observations on the current market:
- Impact of New Market Capacity – Just like any other market, Directors and Officers (D&O) insurance is driven by basic supply and demand. Over the past 18 months, there has been a significant influx of new capital entering the public company D&O space, either through new insurers (to the product line) or through MGA/MGU vehicles. While this new capacity has thus far not been materially impactful in terms of overall market participation, there is no question the newer market entrants will continue to create competition with legacy carriers. This will lead to client leverage and better pricing outcomes, especially on excess layer placements. We expect this capital to really get to work in 2022.
- Increased D&O Insurer Appetite for New Business – Recognizing that the current market still offers attractive pricing, some leading D&O insurers have clearly recalibrated their approach toward new business opportunities in a concerted effort to gain greater market share. Clients with excellent financial and operational performance, strong balance sheets, and superior corporate governance standards are attracting considerably more interest from D&O insurers than they did last year. For the most part, primary layer placements continue to renew with incumbent carriers. But we are seeing some movement on excess layers as D&O insurers that have competed for primary opportunities are getting rewarded with excess layer participation.
- Focus on Client-Specific Underwriting – In 2020, we saw a considerable amount of “portfolio underwriting” where the perceived risk characteristics of an individual client company garnered little attention. As a rising tide lifts all boats, clients were subject to broadly consistent premium rate and retention increases based on their industry sector and market capitalizations. Today, we think the market is underwriting clients much more objectively. Some client programs are perceived as still being underpriced, whereas others might be viewed as being priced above market. Either way, D&O insurers are paying more attention to the specific client risk as opposed to taking a “peanut butter” (spreading) approach across their book of business.
- Underwriter Merry-Go-Round – There has been an unprecedented level of personnel movement in the D&O market, with underwriters and management teams coming and going between different insurers and facilities. Industrywide, there is a scarcity of underwriting talent, and some D&O insurers also seem to be challenged in terms of their professional staffing. This demand for talent is driving up operational costs for insurers, which conceivably could have an inflationary effect on the future pricing of their product. A more likely scenario, however, is that these cost pressures will push D&O insurers to grow and compete more aggressively for business.
- Initial Public Offerings (IPOs) and Special Purpose Acquisition Corporations (SPACs) –The D&O market remains incredibly challenging for companies filing for an IPO, including SPACs, or for companies still within a three-year window of their IPO. D&O insurers continue to be very cautious with risk selection and capacity deployment, even though the substantial premium rates and retentions on offer are seemingly very much in their favor.
The explosive recent growth in IPO and SPAC formations has led to an increase in the number of U.S. publicly traded companies, but the jury is still out on whether this business will ultimately be profitable for D&O insurers. Year to date, there have been over 20 SPAC-related securities class actions filed. And since there are currently 485 active SPACs seeking their merger targets, we would expect SPAC-related securities litigation to escalate considerably in 2022.
- Securities Class Action (SCA) filings Continue to Decline – Notwithstanding the cautionary comments on anticipated SPAC-related claims, the general trend of SCA filings is promising. According to litigation data from Stanford Securities Class Action Clearinghouse, 162 companies have been named as defendants in federal SCA actions year to date as of October 2021. This compares with 321 cases in 2020 and an average of over 400 companies facing lawsuits in federal securities fraud cases each year from 2017 to 2019. Disclosure 1
Some of this lower filing volume in federal courts can be attributed to a change in plaintiff attorney strategy on “merger objection” cases, but nevertheless the trend is encouraging. According to Cornerstone Research in their 2021 Midyear Assessment report on securities litigation, the likelihood or susceptibility of a U.S. domiciled company being named as a defendant in an SCA decreased to 4.2%, the lowest rate since 2014.
- Coverage Quality Remains Strong – Despite the challenges of the past several years, it is worth noting that D&O insurers have not made significant efforts to scale back meaningful coverage terms and conditions, and they continue to provide clients with high-quality coverage solutions.
As we look forward to 2022, we believe we’re now hopefully at the start of a more “buyer-friendly” market cycle. We predict that competition in the market will generally lead to more successful renewals. But with an enhanced focus on client-specific underwriting by D&O insurers, clients should expect to see some variance in renewal outcomes.
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© 2021 McGriff Insurance Services, Inc. All rights reserved. McGriff Insurance Services, Inc. is a subsidiary of Truist Insurance Holdings, Inc. The information, analyses, opinions and/or recommendations contained herein relating to the impact or the potential impact of coronavirus/COVID-19 on insurance coverage or any insurance policy is not a legal opinion, warranty or guarantee, and should not be relied upon as such. This communication is intended for informational use only. Given the on-going and constantly changing situation with respect to the coronavirus/COVID-19 pandemic, this communication does not necessarily reflect the latest information regarding recently-enacted, pending or proposed legislation or guidance that could override, alter or otherwise affect existing insurance coverage.
This communication is intended for informational use only. As insurance agents or brokers, we do not have the authority to render legal advice or to make coverage decisions, and you should submit all claims to your insurance carrier for evaluation. At your discretion, please consult with an attorney at your own expense for specific advice in this regard.
This bulletin is provided for informational purposes only. McGriff is not providing legal advice and recommends you consult with your own counsel for legal guidance/opinion. The information, analyses, opinions and/or recommendations contained herein relating to the impact or the potential impact of coronavirus/COVID-19 on insurance coverage or any insurance policy is not a legal opinion, warranty or guarantee, and should not be relied upon as such. This communication is intended for informational use only. As insurance agents or brokers, we do not have the authority to render legal advice or to make coverage decisions, and you should submit all claims to your insurance carrier for evaluation. Given the on-going and constantly changing situation with respect to the coronavirus/COVID-19 pandemic, this communication does not necessarily reflect the latest information regarding recently-enacted, pending or proposed legislation or guidance that could override, alter or otherwise affect existing insurance coverage. At your discretion, please consult with an attorney at your own expense for specific advice in this regard.
Stanford Law School, Securities Class Action Clearinghouse, https://securities.stanford.edu/charts.html, accessed October 28, 2021.
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