Insurance Marketplace Realities 2023 - Directors and officers liability

Rate predictions: Directors & officers liability

	Trend	Range
Stable risk profiles
Public company — primary		-7.5% to +2.5%
Public company — excess layers		-15% to flat
Private, not-for-profit — overall		-10% to +7.5%
Side-A/DIC		-15% to flat
Challenged risk profiles
Non-U.S. parent, U.S. exposures	Case-by-case basis; potential increases; may experience limited interest
IPOs and SPACs	Case-by-case basis; potential increases; may experience limited interest
Challenged industries	Case-by-case basis; potential increases; may experience limited interest

Broader market conditions have improved since the peak of the hard market in Q3 2020. Moderation has been significant and is expected to continue into 2023.

• Impact of newer capacity
• The influx of capacity into the market since late 2020 created competition and yielded rate deceleration throughout 2021. Throughout 2022, we have seen flattened-to-improved D&O premium outcomes.
• Newer markets initially generated rate relief in the excess layers; however, as markets continue to seek growth, several carriers are providing alternative primary competition and leverage.
• Economic uncertainty: Recovery from a lingering pandemic has yielded economic growth; however, D&O underwriters remain concerned with uncertainties that arise from global tensions and hostilities, inflation, supply chain issues, the scaling back of government subsidies and resulting challenges surrounding continued growth and insolvencies.
• D&O underwriter focus: Carriers continue to scrutinize financial strength (especially liquidity); supply chain and customer demand; environmental, social and governance (ESG) practices; industry; claim history; regulatory uncertainty; loss-cost escalation; cyber and privacy; employee relations and retention; and systemic exposures.
• Initial public offerings (IPOs) and special purpose acquisition companies (SPACs): Despite the decrease of IPO and SPAC IPO filings in the first half of 2022 (see Trends and Exposures section below), insurers remain focused on post-offering operational viability. Primary market conditions continue to be challenged for larger offerings, while conditions are improving for smaller offerings and those insureds remaining within the IPO liability window, as well as excess layers more broadly. Companies exiting IPO windows and with otherwise stable profiles may experience retention reductions and more significant decreases than the rest of the market.
• Private and non-profit companies: The moderation of rate increases in 2021 has continued well into 2022. Yet a “tale of two markets” for many private and not-for-profit organizations creates contrasts in renewals for stable risk profiles and industries versus high-risk profiles and challenged industries.
  • Primary: Insureds with low and stable risk profiles are seeing enhanced competition, with a minimum of flat renewals and decreases when marketed. The market for high and/or distressed risk profiles remains challenging.
  • Excess: For larger risks, excess markets have recalibrated increased limit factors (ILFs).
  • Retentions: For challenged risks and those with large exposure increases, carriers continue to press for higher retentions. Even for smaller risks, minimum retentions are being scrutinized and regularly increased. Severity of increases most often depends on prior renewal increases and the need, if any, for continued correction.
  • Increased deployment: Carriers are willing to regularly deploy capacity for preferred risks. Additional capacity can be found for more risks than in recent quarters. This is having an impact on market conditions more broadly, especially for more desirable risks.
• Side A: Competition among insurers for Side A business has been reinvigorated following a protracted period of rate adjustment. Competition is driven largely by newer market entrants.

Underwriting: D&O portfolio adjustments will continue into 2023.

• We expect rates to continue deceleration into softer market conditions ahead.
• Much of the current market competition is in the excess ABC layers, as reflected in more competitive ILFs.
• Some buyers remain challenged, including:
• 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: Organizations face increased pressures to address ESG concerns from operational and investment perspectives. Questions of adequacy of disclosures create both shareholder and regulatory exposures. Heightened exposures have resulted in increased underwriter scrutiny into ESG practices more broadly. We note, however, the rise of cautionary messaging from state attorneys general and shareholders to ensure ESG practices do not impair profitability or investment return.
• Securities class actions: SCA filings totaling 218 in 2021 represented just over half of average annual filings between 2017 – 2019. Through Q2 2022, 110 SCAs were filed which, annualized, would reflect 220 filings, essentially flat YOY. Fewer M&A-related cases filed as class actions are largely responsible for the decrease since 2019. In fact, “core” filings (i.e., those without M&A allegations) in the first half of 2022 (105) remain consistent with the 1997 – 2021 semiannual average number of core filings (114). Conclusion: despite a significant decrease from recent record high filing frequency, current filing frequency is in line with historic norms.
• IPOs, SPACs: Initial public offering activity is down substantially, from 968 offerings in 2021 to 100 through H1 2022 (200 annualized). A downward trend is expected to continue due to proposed SEC rules and government scrutiny into SPACs and de-SPAC combinations. Yet, related SCA filings persist at high levels, with 2022 filings (21 through August) on pace to match 2021 record annual filings (33). We also have observed that several SPACs have been unable to secure acquisition targets with contractual deadlines to do so approaching. We will monitor to what degree litigation may (or may not) arise from this emerging development.
• Restructuring/bankruptcy/insolvency: Chapter 11 bankruptcy filings through the first half of 2022 trended below 2021 year-to-date filings and well below 2018-2020 levels. Nevertheless, there were unusually higher August 2022 Chapter 11 filings, suggesting inconsistent filing activity following the slowing or ending of government subsidies. Bankruptcy claims, which impact both private and public companies, can be among the most severe.
• D&O risk post-Dobbs (overturning Roe v. Wade): Following the U.S. Supreme Court decision in Dobbs v. Jackson Women’s Health Organization, overturning Roe v. Wade, some companies are implementing protocols to assist employees in gaining access to healthcare services they may not be able to obtain in their own states. D&O risks arise as to possible violations of newly implemented state laws and related civil and criminal investigations and proceedings.
• 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 awarded in the 11-year history of the whistleblower program. Accelerated whistleblower activity reflects heightened regulatory scrutiny and prosecutorial success. We are monitoring whistleblower award activity throughout 2022 and will report on published figures in subsequent market reports.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

Contacts

---

John M. Orr

D&O Liability Product Leader
FINEX North America

email Email phone +1 415 955 0196

---

Lawrence Fine

Management Liability Coverage Leader, FINEX North America

email Email phone +1 212 309 3623

---