Diversified Insurance Group is providing a Public D&O Insurance Market Update to educate the public. Many people are looking to 2021 with trepidation. Diversified Insurance Group is one of the leading brokers serving publicly traded companies and large, complex privately-held organizations in the Intermountain West.  With vast experience placing Directors and Officers Liability coverage, we are sharing our expertise in providing director-level education.  Educating clients and the broader business community is one of Diversified’s core missions.  It’s in that spirit that we provide this Public D&O Insurance Market Update.

A Challenging Commercial Insurance Market

As Insurance Business Mag suggests, from reading USI’s “Q2-2020 Commercial Property & Casualty Insurance Market Outlook Report,” both the public and private company marketplaces continue to see premium and retention increases, “with COVID-19 hastening the pace.”

We find ourselves in the midst of a challenging commercial insurance market at a macro level. As we focus on several hot spots in the insurance market, the sector that has been the hardest hit is the public company directors and officers liability insurance marketplace. When we talk about hard markets, we are generally referring to increasing premium rates and pricing for coverage. 

However, over the past 2 ½ years, the D&O market has experienced challenges beyond rapidly increasing pricing. We are also experiencing the additional challenges of limited underwriting appetites, reduced limit capacity, and increased self-insured retentions. As if 2020 didn’t present enough challenges, we are now experiencing the most difficult public company D&O market of the past 30 years. 

There are several reasons for this hardening in the D&O market conditions, but there are 3 primary themes that stand out:

1. Securities Class Action Claims
2. Case Law Developments
3. Economic Uncertainty Due to COVID-19

Securities Class Actions Claims

According to CNBC, this year may bring sticker shock for publicly traded U.S. companies when they get their insurance bill. First, we need to discuss Securities Class Actions Claims – there has been a substantial increase in the number of securities class action cases filed in the United States and in the settlement amounts over the last 5 years. 

• Securities class action filings are increasing in both the number of cases and in the number of settlements. Publicly traded companies now have a greater than 5% of being sued – this is an all-time high.
• The total number of claims and the likelihood of a claim has set new records in each of the last 5 years. 

Case Law Developments

Second, Case Law Developments – in March 2018 the US Supreme Court ruled that state courts, in addition to federal courts, have jurisdiction over securities class actions as it relates to the Securities Act of 1933.  Of particular concern is Section 11 of the ’33 Act which pertains to the strict liability that directors and officers have for 2 years following a public offering of securities.  This means that claims against an IPO company can be brought in both state and federal venues simultaneously.  What’s worse is that State Courts aren’t as experienced with federal securities laws, don’t allow for a stay of discovery during motions to dismiss, and have become increasingly problematic for insureds and insurers to manage – most often leading to a quick settlement. 

Economic Uncertainty Due to COVID-19

Third, the economic uncertainty arising out of the COVID-19 global pandemic is causing underwriters to fear increased litigation. This is a result of shutdowns, layoffs, delayed fund-raising or product launches, supply-chain disruptions, a general increased risk of insolvency, and stock market volatility. All of these things are contributing to the current situation we’re describing in this insurance market update.

Insurance Rates are Increasing

As a result of these challenging factors, we’re seeing D&O rate increases of 60-70% on the low end and up to 300% on the high end. On top of the significant pricing increases, most insureds are being forced to take higher retentions. Others are required to incorporate additional restrictions like co-insurance or reduced limits of insurance. For example, if you’re an IPO company in the 4^th quarter of 2020, you should expect to pay 4 to 5 times more for the first $10M of insurance than just 3 years ago. The retentions have increased 4 to 5 times as well.

So, what does this insurance market update mean? Are we just throwing our hands in the air and resolving to overpay and be underinsured? While I’m not promising that you won’t see rate increases or coverage decreases, I can tell you that a good insurance broker will help you navigate these troubled waters. Working with underwriters early in the process to increase the level of communication and information sharing can certainly help to dampen underwriters’ fears. Additionally, a broad, comprehensive marketing strategy and creative coverage design options can further improve the outcome of securing the most favorable terms available for your renewal.

If you have questions or concerns regarding your D&O insurance renewal, please contact us here.  We would love to share our team’s 90+ years of collective experience to help you with your D&O insurance program.