Impacts to FINEX risks for the second half of 2021
After weathering a very turbulent insurance marketplace in 2020, many technology (“tech”) clients are continuing to face challenging financial lines renewals in 2021. While most insurance companies are experiencing levels of stabilization, particularly at excess layers, the insurance markets continue to correct their director and officers (“D&O”) portfolios, affecting tech companies with even strong risk profiles
To prepare our clients for the issues that underwriters are focused on, we closely monitor trends specifically impacting our tech clients. Three of these key trends are explained below.
Litigation stemming from recent legislative and regulatory initiatives meant to promote I&D have been impacting tech companies. Specifically, two laws passed in California requiring public companies to have a certain number of female and racially diverse board members were signed into law in 2018.
The new legislation opened up a wave of shareholder derivative lawsuit filings, many in California, impacting many large, high profile tech companies. Generally, these shareholder complaints allege corporate breach of fiduciary duty for failure to diversify leadership. While many of the initial suits were filed by the same firm, Bottini and Bottini, we are seeing other plaintiff firms catching on and filing suits as well.
Recently, two of the higher profile suits have been dismissed, which may have important implications for other board diversity lawsuits. In both of these dismissals, the courts granted motions to dismiss, citing at least in part the forum selection clauses in the company’s by-laws. Whether or not the plaintiffs’ firms involved in this litigation will refile in Delaware is to be determined.
While we have seen recent suits dismissed on procedural grounds, there is no doubt that these issues are still of major concern from a D&O litigation perspective. In September 2020, a large tech company settled the largest #MeToo-related derivative suit on record. The litigation alleged that the company’s current and former directors and officers participated in a culture that fostered a long- standing pattern of sexual harassment and discrimination. The case resulted in plaintiff fee awards of over $40 million, split between California and Delaware plaintiff firms. Also, as part of the settlement, the company agreed to establish a $310 million Inclusion & Diversity fund to be used over 10 years. The fund is to be used to support a set of global initiatives – the Workplace Initiative – to adopt best-in-class employment policies and fiduciary training for the Board. In addition, the settlement creates a separate I&D Advisory Council and Leadership Development & Compensation Committee to promote a workplace free from employee discrimination. With significant changes to the company’s policies and culture, not only will this help re-shape the company, but this may help to set the standard for culture change at other tech companies in Silicon Valley and beyond.
IPOs in 2020 started off slow but picked up in the early part of the summer, and from there went full steam ahead. While 2020 was a record-breaking year for IPOs, reaching almost 500 by year-end, even more newsworthy is that 247 were special purpose acquisition company (SPAC) IPOs. SPAC IPOs represented more than half of all IPOs. Of the record-breaking number of IPO’s in 2020, 165 were in the tech space, including health technology (103), technology services (57), and electronic technology (5).
Looking back at the first half of 2021, traditional tech IPOs had a robust start to the year, and with many more in the pipeline. From January 2021 to July 23, 2021, there have been 35 tech/tech-ish IPOs. In addition, so far this year, there have been nine SPAC IPOs, which are non-traditional IPOs. With SPACs increasingly becoming more popular, will SPACs outpace traditional IPOs in the long run?
Certain industry sectors, such as the high-tech, are more frequently hit with securities claim actions. A full 23% of all federal court securities class actions in 2020 were filed against companies in the “Electronic Technology and Technology Services” industry.
The SPAC landscape is being closely monitored. There has been much more regulatory interest and scrutiny in recent months, which is expected to attract plaintiffs’ attorneys. Several firms have already developed specific “SPAC task forces,” focused on identifying routes to bring suit against these blank check companies.
With an uptick in IPOs & SPACs for 2021 in the tech space, we expect the increase in IPO and SPAC Security Claims trend to continue.
During the height of the pandemic, the tech industry was majorly impacted by layoffs, particularly in Silicon Valley. While some in the tech industry saw greater demand during the pandemic, others in the sector did not fare so well.
While a majority of the layoffs occurred over the course of 2020, we are still are seeing reduction in headcount in 2021, not only due to COVID-19, but also due in part to the semiconductor shortage that is impacting the tech industry and beyond given the heavy reliance on Asia-Pacific chip suppliers. U.S. tech firms obtain up to 90% of their semi-conductors from Taiwan, where the output of such components has been severally disrupted.
In order to combat this shortage and jump start American based semiconductor production, Senate Majority Leader Chuck Schumer and Senator Todd Young introduced the U.S. Innovation and Competition Act, which recently cleared the Senate with bipartisan support. This legislation specifically sets aside $52 billion to fund semiconductor research, design and manufacturing work. It is intended to stimulate both U.S. public and private entities in developing and accelerating new technologies and is currently working its way through the House.
From a claims perspective, naturally it can be anticipated that increased layoffs will lead to additional employment-related claims being brought – often alleging allegations such as discrimination, lack of remote work/leave & accommodation, wage & hour violations, and retaliation/whistleblower claims.
In the second half of 2021, absent changes in risk or claims activity, we anticipate public company D&O renewals will see primary increases generally in the range of +10% to +25%, with excess placements seeing +5% to +30%. Pricing changes on Side A DIC placements will likely vary on a case by case basis. Primary and excess private company D&O renewals can also expect continued pricing pressure, in the range of +10% to +45%.
As for EPL renewals, and in the absence of changes in risk or claims activity, we anticipate increases in the +10% to +30% range for domestic markets, +10% to +20%, with minimum retentions of $1 million to $1.5 million, in the Bermuda markets.
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 subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.
