The directors and officers (D&O) liability market in the US is stagnating as premiums charged are not adequate to cover the risks that insurers are assuming in this line of business, according to the “US Public Directors & Officers Liability Insurance Market Analysis,” by leading international reinsurer TransRe. Overall pricing is down 15% since 2013 and year-to-date data for 2018 so far suggests a flattening price environment, even as loss ratios have spiked from 2013 onwards.
The TransRe report brought together publicly available data, licensed third party data, and TransRe’s data analytics engine to take a comprehensive look at the public D&O market and the challenges facing insurers in this space. It outlined that the factors contributing to an unsustainable D&O market have been brewing in the industry for years, and in part stem from a surge in supply in the mid-2010s.
During that period, both traditional capital and third party capital from hedge funds was coming into the industry, mainly focusing on short-tail property. When those prices got pushed down, traditional capacity moved into the professional liability space where they could find a margin, explained Brian Finlay, TransRe’s head of North American Treaty for directors and officers, and errors and omissions liability.
“At about the same time, we saw a proliferation of smaller plaintiff firms beginning or re-engaging their practices and growing,” he said, adding that the legal landscape, as it has evolved into the present today, continues to be a threat. “These invigorated firms, coupled with the traditional firms, are well established, have capital to pursue cases and are willing to prolong cases until they achieve meaningful settlements. All the while, the defence costs are piling up on these complex cases for the insureds and their carriers.”
Public company boards have contributed to the profitability challenges facing insurers. Equifax struggled to deliver timely news about its major breach to shareholders and the general public. Steve Wynn’s departure as Wynn Resorts CEO and chairman is one high profile example of the #MeToo movement, having survived motion to dismiss in September 2018. Most recently, Nike, whose stock price has performed exceptionally well for investors, became the target of a D&O suit surrounding their handling of alleged sexual harassment. Public company boards must improve how they handle these burgeoning exposures.
Problematically, as the risks are increasing and supply is booming, companies are not buying more D&O insurance and total premium in the space has been stagnant over the past four years, hovering at around $6.4 billion, according to the TransRe analysis.
“When you have emerging risks coming in, such as cyber, the overall insurance budgets of these companies don’t necessarily expand, but the emerging risks attract the scrutiny and budgets of insurance and technology,” said Finlay. “That reallocation of budgets mean companies haven’t been buying new limits in the D&O market despite the discounted pricing, so there’s been a stagnation in the pool of premium, which has failed to keep pace with the rising claims.”
This failure to buy sufficient coverage is despite the stock markets being close to their all-time highs. As market caps rise because of an elevated stock market and growing economy, companies stand to lose much more should they encounter an allegation against an executive or board, revealing the shaky ground that many are treading by not buying higher limits.
“Corporate risk managers and their insurance advisors need to be forthright with their boards, explaining the overall situation,” said Finlay. “Frequency is up, allegations are up, causations are up, but yet premiums down as evident in the study.”
The strong message from TransRe’s analysis is that the price for companies’ D&O insurance is going to have to go up. The frequency and severity of loss events means insurers need to cover the losses they are paying.
Insurers have already begun to take corrective actions. TransRe’s public D&O price index highlights that pricing is tipping upwards or has leveled out in 2017 and 2018 across small, mid, and large caps.
“At least people are starting to say that this doesn’t make sense to us from an insurance carrier standpoint,” said Finlay. “There is recognition that there probably has to be some sort of rate correction, and it will take time – it took us time to get to the point we’re at right now and it’s going to take us time, as an industry, to get it to where it should be.”
When asked how much correction is needed, Finlay responded, “If you correctly account for the prolonged price deterioration and nominal loss cost trend, at minimum 35 to 40% across the public D&O portfolio.”