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Survey Report

Insurance Marketplace Realities 2022 Spring Update – Directors & officers liability

April 7, 2022

Increases in rates and retentions have moderated significantly since the peak of the hard market. New capacity continues to drive more competitive market dynamics.
Financial, Executive and Professional Risks (FINEX)
Rate predictions: Directors & officers liability
  Trend Range
Stable risk profiles
Public company — primary Neutral increase (yellow line, purple triangle pointing up) Flat to +20%
Public company — excess layers Neutral increase (yellow line, purple triangle pointing up) -5% to +10%
Private and not-for-profit — overall Increase (Purple triangle pointing up) +5% to 20%
Side-A/DIC Case-by-case, with minimums impacting most risks
Challenged risk profiles
Non-U.S. parent Case-by-case; large potential rate and retention increases
U.S. exposures
IPOs and SPACs
Case-by-case; large potential rate and retention increases
Challenged industries Case-by-case; large potential rate and retention increases

Key takeaway

Increases in rates and retentions have moderated significantly since the peak of the hard market. New capacity continues to drive more competitive market dynamics.

Broader market conditions have improved since the peak of the hard market in Q3 2020. Although rate increases persist, moderation has been significant and is expected to continue through the remainder of 2022.

  • Newer markets with fewer legacy claims are attracted to the current pricing environment.
  • New excess capacity has yielded ongoing moderation of rate increases since the peak in 2020. This capacity inflow has given buyers leverage and an enhanced ability to fill capacity holes.
  • Traditional insurers, however, continue to seek corrections.
  • A tale of two markets persists: More favorable risks are the initial beneficiaries of new capacity. More challenged risks continue to experience hard market challenges. This is especially the case with private and not-for-profit organizations.
  • Economic uncertainty: Recovery from the lingering pandemic has brought economic growth; however, headwinds associated with global tensions and hostilities, inflation, supply chain issues, staffing, scaling back of government subsidies and pervasive tensions around public health measures create uncertainties about continued growth, business reopenings and insolvencies.
  • D&O underwriter focus: Carriers are looking at financial strength (especially liquidity); environmental, social and governance (ESG) concerns; industry; claim history; COVID-19 resilience; regulatory uncertainty; loss-cost escalation; cyber and privacy; event-driven claims; and systemic exposures.
  • Initial public offerings (IPOs) and special purpose acquisition companies (SPACs): IPO filings increased significantly in 2021. More than half were SPAC IPOs. This, coupled with increased SPAC-related securities litigation, continues to manifest in heightened underwriter uncertainty and hard market terms and conditions.
  • Private and non-profit companies: Accelerated rate increases experienced in 2020 levelled off in 2021 and continue to do so in 2022. Yet the tale of two markets for many private and not-for-profit organizations creates sharp contrasts in renewals for stable risk profiles and industries vs. high-risk profiles and challenged industries.
    • Primary: Insureds with low and stable risk profiles are seeing enhanced competition, even flat renewals or decreases in select instances, the tradeoff being higher retentions. The market for high and/or distressed risk profiles remains challenging.
    • Excess: For larger risks, excess markets have recalibrated increased limit factors (ILFs). For challenging risks, inverted pricing may occur, where higher excess layer pricing may exceed pricing in the layers below.
    • Retentions: Carriers continue to press for higher retentions. Even for smaller risks, minimum retentions are being scrutinized and regularly increased. The severity of the increases most often depends on prior renewal increases and the need, if any, for continued correction.
    • Conservative deployment: The discipline demonstrated by leading insurers has been taken up broadly and for the most part consistently across D&O markets.
    • Capacity: Capacity is more widely available than in recent quarters, which is having a buyer-friendly impact on market conditions — especially for preferred risks.
  • Side A: Predictions on across-the-board rate changes for Side A placements remain less reliable. Instead, over the past several quarters, we have seen lead Side A minimum premiums, regardless of expiring rate. Pricing changes may, therefore, be more or less severe depending on the insured’s expiring premium.

Underwriting: D&O portfolio adjustments will continue into 2022.

  • Thanks to new capacity, we expect decelerating rate increases ahead.
  • Excess pricing recalibration has fallen off, a trend we expect to continue into 2022. In some cases, we may see decreases on layers that were overcorrected during the hard market.
  • The tightening of terms we saw in the first half of 2021 has moderated and is expected to continue moderating into 2022.
  • Some buyers will be particularly challenged.
    • Non-U.S. parent, U.S. exposures
    • IPOs and SPACs
    • Challenged industries, e.g., oil and gas, healthcare, life sciences, higher education, cryptocurrency, cannabis, retail (private), restaurants (private), sports/entertainment (private)
    • Liquidity challenged and pre-restructuring/bankruptcy risks

Several trends and exposures bear watching.

  • ESG, inclusion and diversity (I&D): Organizations face increased pressures to address ESG concerns from operational and investment perspectives. Questions of adequacy of disclosures create both shareholder and regulatory exposures. Board diversity and corporate I&D protocols also remain critical to D&O risk. Heightened exposures have resulted in increased underwriter scrutiny into ESG practices more broadly.
  • Securities class actions: SCA filings in 2021 decreased dramatically YOY, to just over half of average annual filings in 2017 – 2019. Significantly fewer SCAs related to M&A are largely responsible, yet even traditional (non-M&A) class action filings have decreased. Average settlements in 2021 were less than half of the 2021 – 2022 average. Median settlements are below $10 million for the first time since 2017.
  • SEC whistleblower awards on the rise: In FY 2021, the SEC awarded approximately $564 million in whistleblower awards to 108 individuals, representing the largest amount and the largest number of individuals so awarded in a single fiscal year. Stunningly, these figures are approximately the same as the total dollar amount and number of individuals awarded in the 11-year history of the whistleblower program. The SEC announced an additional award and, separately, three more, in January 2022, totaling more than $53 million which, extrapolated, would put 2022 on pace for a new record. Whistleblower awards themselves do not represent D&O insurer losses, but companies with major whistleblower situations generally experience securities litigation. This accelerated whistleblower activity also reflects heightened regulatory scrutiny and prosecutorial success in the current presidential administration.
  • IPOs, SPACs: IPO filings increased significantly in 2021. More than half were SPAC IPOs. SEC statements on the accounting treatment of SPAC warrants slowed SPAC activity in the second and third quarters of 2021. Nevertheless, the growth in traditional public offerings, as well as ongoing SPAC-related activity, continues to manifest in heightened underwriter uncertainty.
  • Restructuring/bankruptcy/insolvency: Chapter 11 filings in 2021 trended below historical averages and well below filing levels in 2020. Nevertheless, with government subsidies slowing or ending, and with continued economic uncertainties ahead of us, we may see a rise in filings. Bankruptcy claims, which impact both private and public companies, can be among the most severe.
  • Duty of oversight claims: Plaintiffs asserting Caremark duty of oversight claims in Delaware derivative litigation have had recent success in overcoming motions to dismiss, leading some to suggest a weakening of high Caremark pleading standards. Are increased Caremark claims and related increased books and records demands on the horizon?

Side A D&O in a captive? Changes in Delaware law may ease some but not all prior concerns.

  • Changes to Delaware’s indemnification law, signed into law in February 2022, would authorize, with conditions, the use of captive insurance to cover D&O liabilities, whether or not the corporation would have the power legally to indemnify. The changes may ease previous concerns about the ability to insure non-indemnifiable (Side A) losses in a captive, particularly with regard to certain derivative lawsuit losses.
  • Nevertheless, concerns persist about whether a captive may pay bankruptcy-related Side A losses, a question the law is silent on. Solutions may be available to address the Side A bankruptcy exposure, such as access to credit markets, indemnification trusts and other, less-traditional alternative insurance structures.


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FINEX North America

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FINEX North America

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