For D&O liability insurance, 2021 represented a year of market transition. The hard market, which peaked in the third quarter of 2020, included a culmination of pre-pandemic underwriting challenges and even greater challenges brought on by the pandemic itself. In 2021, however, the market began to stabilize, principally due to the inflow of new capacity in late 2020 and 2021. Rate increases decelerated, securities litigation filings decreased for a second straight year to levels of just over half of 2017-2019 historic highs.
Yet, other factors arose throughout the year that warrant caution going forward. The economic resurgence in 2021 has been tempered by inflationary concerns, staffing and supply chain challenges. In addition, although it once appeared the worst of the pandemic was behind us, the dramatic spike in cases over the 2021 holidays and into the new year, as well as issues surrounding vaccine mandates and other health and safety measures, present uncertainties about the strength of continued recovery.
With that as a backdrop, we recap top D&O liability and market issues of 2021 below and then look ahead to the environment of 2022.
Throughout 2021, organizations have faced increasing pressures from regulators and investors to address ESG concerns from operational and investment perspectives. SEC-mandated climate risk disclosures have only enhanced regulatory and shareholder exposures. Additionally, mandatory board diversity has been the subject of legislation and proposed legislation in several U.S. states, and both board diversity and corporate inclusion and diversity (I&D) programs have been the subject of shareholder litigation against several high-profile companies, in addition to constitutional challenges. The exposures have resulted in increased underwriter scrutiny into ESG practices more broadly, more so on the “E,” or environmental and climate risk, aspect of the ESG acronym.
Over the course of the year, we have offered perspectives on ESG, including Clearing the air: Changes in ESG-related D&O risk in a new U.S. presidential administration in April (republished in our D&O Diary guest post), and in our December FINEX Flash webcast, “ESG and Event-Driven Litigation.”
The frequency of federal SCA filings was down in 2021 over 2020 filings. At the close of 2021, 206 cases (both core cases with Section 10(b) allegations and non-core cases) had been filed, which reflect the fewest number of annual filings since 2014, and just over half of annual filings in the historically high period of 2017 to 20191 Fewer M&A-related class actions accounted for much of overall decrease. Defending securities litigation in the context of evolving risks can present many challenges and, in May, we produced a timely FINEX Flash webcast on the subject.
Law impacting securities litigation emerged from the U.S. Supreme Court in 2021, specifically involving class certification in SCAs. We previewed the case, Goldman Sachs Group Inc. v. Arkansas Teacher Retirement System (USSC, 20-222, June 2021), in Securities litigation update: Supreme Court to weigh class certification issues.
In its subsequently issued decision,2 the Court sided with Goldman Sachs in allowing the lower court to consider whether alleged misrepresentations were merely generic statements on which market reliance was unlikely – and to do so at the earlier “class certification” phase of litigation. The Court held that such considerations should be allowed, even though the factual issue of “materiality” is still reserved for the later “merits” stage of litigation.
Initial public offering (IPO) filings more than doubled in 2021 over 2020.3 Although many of the filings involved special purpose acquisition company (SPAC) IPOs, SPAC formations and offerings slowed substantially after the first quarter of the year due, in part, to the SEC’s statement on the accounting treatment of SPAC warrants. Our observations on the subject of SPACs included a discussion of the importance of D&O insurance to SPAC sponsors, and a more recent webcast, 2021: A SPAC Odyssey.
Litigation frequency around SPACs and de-SPAC business combinations remained relatively low in numbers in 2021 but accelerated significantly on a percentage basis over 2020. Only four SCAs in 2020 involved SPAC combinations, whereas 28 such cases were filed through November 2021 alone, a seven-fold increase.4 As a result of increased IPO activity and SPAC-related litigation, SPACs and organizations going public experienced sustained hard market D&O underwriting conditions throughout the year, including heightened underwriter scrutiny, high retentions, hard-market pricing, and conservative terms.
The influence of social media on stock value fluctuation: The influence of social media in the manipulation of stock valuation and trading emerged like a tidal wave in the early part of the year, leading to swift and significant volatility in the stock prices of several high-profile companies. Despite some predictions, the phenomenon did not progress into a trend through the rest of the year. Nevertheless, an ever-expanding presence of social media in the context of investment and investing platforms has the potential to impact D&O risk over time. Our views on this important subject can be found in our article from February, D&O risk amid the frenzy of social media stock trading influence.
Our understanding of D&O risk derives not just from claims and other risk and insurance market trends, but also from the perception of risk by the very directors, officers, and risk managers most impacted. In our 8th Annual Directors’ Liability Survey, published in April, we surveyed corporate officials from around the globe to determine their greatest risk concerns. In a year of uncertainty around COVID-19, economic resurgence and solvency, it may have been a surprise to some that the top five risks identified by survey respondents were, in order, Cyber-attack, Data loss, Regulatory risk, Health & Safety and Risk of Employment Claims. Our summary of the survey, along with important commentary around its results, was published in our article, 8th Directors’ Liability Survey, as well as in our D&O Diary guest post. We also produced a webcast, featuring discussion of the subject by FINEX colleagues globally.
Coming off of more than two years of hard market conditions, which peaked in the third quarter of 2020, the public company D&O liability insurance market in 2021 experienced a significant deceleration of rate increases. The factor most responsible for the offsetting of hard market challenges was new insurance market capacity, predominantly in excess layers. This capacity inflow led to additional buyer leverage and an enhanced ability to address capacity challenges. And still, a tale of two markets persisted: more favorable risks were the initial beneficiaries of new capacity, but more challenged risks continued to experience hard market challenges.
Our market perspectives took many forms in 2021, including our Insurance Marketplace Realities 2021 Spring Update – Directors and officers liability, and in our autumn release, Insurance Marketplace Realities 2022 – Directors and officers liability. We also published industry-specific market reports in our FINEX Observer series, including: FINEX Observer: Technology focus, Financial lines challenges facing the healthcare industry, and FINEX Observer: Higher education focus.
Pandemic uncertainty: The phenomenon impacting all of our lives in 2020 and 2021 will likely continue in 2022, albeit with a semblance of hope around “getting back to normal.” Economic recovery in the face of the pandemic’s lingering effects began earlier in 2021. Nevertheless, the recent rise in COVID-19 cases involving the Omicron variant, inflation and supply chain concerns, additional COVID-19 variants, and social and political tensions around vaccine mandates and other health and safety measures will continue to present issues over the timing and pace of more sustained growth going forward.
ESG: Focus on ESG issues is likely to continue and to expand as more and more sub-components within the ESG umbrella become subject to regulation and investor scrutiny. Directors and officers are increasingly expected to take responsibility for oversight of more and more issues, and companies are expected to make more disclosures than previously concerning areas beyond pure profit and fewer concerns. With these expanded duties and more wide-ranging public statements will inevitably come continually expanding opportunities for litigation and regulatory exposures.
IPOs and SPACs: There is no sign of slowdown in IPO filings, but changes in the accounting treatment of SPAC warrants in 2021 and the prospect of rigorous SEC rulemaking will likely lead to a continuation of fewer SPAC formations and SPAC IPO filings in 2022. It remains to be seen whether tighter regulation – for example, regulation focusing on public disclosures around SPACs and de-SPAC combinations, examining how companies market themselves, and ensuring banks hired by SPACs are providing deeper levels of scrutiny5 – will be perceived as providing much needed guidance and clarity (decreasing the risks and leading to improved D&O market conditions) or as multiplying the opportunities for footfalls (increasing the risks and further impacting the D&O market).
Bankruptcy/insolvency: Bankruptcy filings were substantially down in the first ten months of 2021 (just 384, which extrapolates to 461 for 12 months),6 the lowest levels in more than 10 years. The only year in the last 10 years with less than 500 filings was 2014 (472). There were 633 bankruptcy filings in 2020, with 71 and 70 flings respectively in June and July of that year.7 It seems likely that the increased filings in 2020 were as a direct or indirect result of COVID, and that the decrease in filings in 2021 was at least partly due to government programs which have kept many struggling companies afloat. As government subsidies and lending programs are phased out, bankruptcy filings are likely to increase, perhaps substantially. Rising inflation and tightening monetary policy may also increase bankruptcy risks.
Underwriting: D&O portfolio adjustments will continue into 2022: Excess pricing recalibration fell off in 2021, a trend we expect to continue into 2022. Additionally, we anticipate the tightening of terms that we saw in the hard market will continue to moderate into next year. Although some buyers will remain challenged (including non-US parent with US D&O exposures, IPOs and SPACs, those in higher risk and COVID-impacted industries, companies with liquidity challenges and re-structuring/bankruptcy risks), most companies will likely see improved conditions affecting their 2022 renewals. Yet, maximizing the benefits of an improving market – from premium savings and expanded capacity opportunities to broadened, more favorable terms and conditions – requires laser focused attention on addressing company-specific exposures and highlighting company-specific risk mitigations. D&O specialists in placement, risk analytics, claims and product thought leadership are essential in assisting every type of entity with all of the rapidly evolving issues.
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).
1 Stanford Securities Class Action Clearinghouse, https://securities.stanford.edu, accessed January 4, 2022. Year-end totals are further scrutinized before full-year reports are issued later in January. As a result, filing figures reflected here are subject to change.
2 https://www.supremecourt.gov/opinions/20pdf/20-222_2c83.pdf
3 https://stockanalysis.com/ipos/statistics/
4 Stanford Securities Class Action Clearinghouse, https://securities.stanford.edu/current-trends.html, accessed December 9, 2021
5 Gura, David, “SEC Chair Gary Gensler says tougher rules for hot, buzzy SPACs are coming soon”, https://www.npr.org/2021/12/07/1062004006/sec-chair-gary-gensler-says-tougher-rules-for-hot-buzzy-spacs-are-coming-soon
6 O’Connor, Michael and Hudgins, David, US corporate bankruptcies reach new low in 2021, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-corporate-bankruptcies-reach-new-low-in-2021-67459322
7 Id.
