The directors & officers (D&O) insurance market could be likened to a dumpster fire in which everybody is getting burned. D&O carriers are struggling with unprecedented losses on the back of years of relatively soft (potentially inadequate) premium pricing. Clients are struggling to adjust to harder market conditions, where they’re offered soaring rates for lower coverage limits and stricter policy terms and conditions. And brokers and agents are taking hits left, right and center as they try to negotiate the best possible outcomes through these very difficult conditions.
There are a multitude of factors driving hardening conditions in the US domestic D&O insurance market. Litigation and settlements are key contributors, with securities class actions reaching an all-time high in 2019, derivative suits also on the rise, and both settling for large dollar amounts, as reported in Woodruff Sawyer’s 2021 D&O Insurance Trends: A Looking Ahead Guide. On top of that, directors and officers face a wide range of emerging risks, including uncertainties around the ongoing COVID-19 pandemic, heightened risk of bankruptcy, and politics/ESG in the boardroom.
It’s very likely that brokers will continue to find the D&O market tough in 2021, according to Priya Cherian Huskins, senior vice-president of management liability at Woodruff Sawyer - the primary reason being that premiums are expected to continue rising. In Woodruff Sawyers’s 2020 Underwriters Weigh In survey, which features 34 major D&O insurance carriers in the United States, 100% of respondents said they believe D&O exposure is increasing, and therefore they expect premiums to go up in tandem.
“Another reason I believe brokers will continue to have difficulty is that the worldwide D&O insurance market is seeing very little new capacity,” said Huskins. “In other times, if the US market was especially difficult, maybe brokers could get more help from the London market. But the London market is arguably in worse condition than the US domestic D&O insurance market right now.”
One silver lining, perhaps, is that hard insurance markets are “usually quite short-term in nature,” according to Huskins, because the insurance hits a price at which it attracts new capital, and the basic laws of supply and demand bring the prices down. However, by the close of 2020, that had not happened to the extent that it would bring D&O insurance pricing down in any significant way in 2021.
“In this environment, clients value being able to discuss their concerns with their insurance broker,” Huskins told Insurance Business. “They also value an insurance broker that can help them discern what is the right limit to buy and what is a good way to approach the D&O insurance market. There’s no magic bullet in this market. Brokers have to engage in the hard work of blocking and tackling, with good processes, while always making sure clients stay apprised of what’s going on.
“At Woodruff Sawyer, our focus continues to be on providing our clients with analytics and other platform resources that help them make good decisions. It’s our goal to ensure that our clients have all the data they need to buy appropriate limits of insurance, and to understand where they’re getting an appropriate return on investment and where they may be overspending for no good reason.”
Woodruff Sawyer collects proprietary securities class action data in its D&O Databox. The brokerage then uses this data when modeling settlement outcomes for clients or forecasting litigation trends. This ties into Huskins’ comment about brokers using data to educate clients so that they know what to expect from the D&O insurance market and can work out a plan of action to transfer their risks accordingly.
The brokerage’s 2020 Underwriters Weigh In survey and accompanying report showcased three years of data from some of the top US D&O insurers. Huskins commented: “We’re delighted that our underwriter partners continue to respond to our questions. It’s a great service to the entire industry, and we’re very proud to be able to present this data.”