Insurance Marketplace Realities 2024 - Directors and officers liability

Rate predictions: Directors and officers liability

	Trend	Range
Stable risk profiles
Primary (public /private company)		-10% to flat
Excess/Side A DIC (public company)		-15% to -10%
Excess/Side A DIC (private company)		-10% to flat
Challenged risk profiles
Non-U.S. parent, U.S. exposures	Case-by-case basis; potential increases; nevertheless, capacity remains available
Liquidity challenged	Case-by-case basis; potential increases; nevertheless, capacity remains available
IPOs and SPACs	Case-by-case basis; potential increases; nevertheless, capacity remains available
Challenged industries	Case-by-case basis; potential increases; nevertheless, capacity remains available

Underwriting

• The influx of capacity into the market since late 2020 created competition and yielded rate deceleration throughout 2021 and 2022. In 2023, we have seen flattened-to-reduced D&O premium outcomes.

• Recent markets initially generated rate relief in the excess layers; however, as markets seek to remain competitive, more carriers, including the more recent markets, are providing alternative primary competition and leverage.
• Continued rate decreases: We expect rates for both excess ABC and Side A to continue decreasing into softer market conditions, including the lowering of ILFs and rate-per-million, reflective of more customary pre-hard market conditions.
• Some buyers remain challenged, including:
  • Non-U.S. parent with U.S. exposures
  • Liquidity-challenged and pre-restructuring/bankruptcy risks
  • Challenged industries, e.g., banking, oil and gas, healthcare, life sciences, higher education, cryptocurrency, cannabis
  • IPOs, de-SPAC business combinations

Industry spotlight

• Life sciences: For stable risks, renewal pricing is likely to depend on the extent of prior year, harder market overcorrections, with most such risks likely to see steeper decreases than the broader market. Anticipate -20% to -10% outcomes on average.
• Healthcare: The market for private, not-for-profit risks remains challenged due to M&A and antitrust concerns, as well as less competition than in the broader market. Stable private, not-for-profit risks can expect primary rate increases in the range of +5% to +15%, with some pressure on antitrust retentions and co-insurance as well. Excess private, not-for-profit layers can anticipate flat to +15% outcomes on average.
• Natural resources: There has not been significant deviation for natural resources companies recently beyond the broader D&O market; however, most companies in this sector are exposed to commodity prices. Some hedge but others allow themselves to be proxies for the underlying commodity. The most significant likelihood of deviating from the market would be an event such as a continuation or escalation of global hostilities, sudden oil price fluctuations, or other events where demand shock might disrupt commodity pricing to an extent it helps or hurts firms more than the broader market.
• Technology, media and telecommunications (TMT): Within the TMT space, semiconductor companies are more challenged, as they continue to experience greater supply chain issues. Although their renewal outcomes are in line with the broader market, they generally start at higher price points compared to other technology companies.

Other market forces

• Securities class actions (SCAs): SCA filings through H1 2023 reflect year-over-year increases, annualized at 228 filings, which would be 10% higher than 2022.
• Broader economic influences: Recovery from the pandemic gave rise to economic growth, and more recent fears of a recession have tapered; however, D&O underwriters remain concerned with uncertainties arising from inflation, interest rates, supply chain issues and global hostilities, among other factors.
• Private and non-profit companies: The moderation of rate increases in 2021 and 2022 has progressed further, with most insureds seeing flat pricing to modest decreases. High-risk profiles and challenged industries may still see increases in pricing/retentions; however, this will be determined on a case-by-case basis.
  • Primary: Insureds with low and/or stable risk profiles are seeing enhanced competition, with flat renewals and decreases when marketed. The market for high and/or distressed risk profiles is improving but can still be challenging.
  • Excess: For larger risks, excess markets have lowered their increased limit factors (ILFs).
  • Retentions: For challenged risks and those with large exposure increases, carriers continue to press for higher retentions. Minimum retentions continue to be scrutinized but have moderated over the past six months. 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. This is having an impact on market conditions more broadly, especially for more desirable risks.

Developments and market driving issues to watch

• Silicon Valley Bank and related banking industry D&O risk: The failures of Silicon Valley Bank, Signature Bank and First Republic Bank have resulted in claims against them and potentially other entities that have suffered setbacks as an indirect result. As of this writing, however, the severity of the phenomenon outside of the banks that were directly involved has mostly dissipated due to government intervention in the backing of deposits. Nevertheless, a total of six securities class actions have been filed in connection with the banking crisis, five in 2023 and one in late 2022. We continue to monitor developments around bank stability, particularly regarding any impact on the banking industry, as well as the economy and markets more broadly.
• Securities class action (SCA) filing frequency and severity: SCA filings increased in the first half of 2023 to 114, annualized to 228. Annualized, this would be a modest increase over the 208 filings in 2022.
  • In contrast, average settlements in the first half of 2023 are down 47% over 2022, to $21 million, although median settlements in the first half of the year are on the rise, from $13 million (adjusted for inflation) to $16 million. We caution, however, that settlement data in any given year may not be reflective of current D&O market conditions. In this regard, they are lagging indicators, i.e., often more accurately reflecting facts specific to cases filed in previous years and without reference to the amount of D&O insurance proceeds used to resolve the litigation.

• Nevada issues “defense outside the limits” legislation: On June 3, 2023, Nevada enacted Assembly Bill 398 prohibiting insurance companies from issuing or renewing liability insurance policies that contain depleting limits provisions. The law does not apply to any liability insurance contract existing on October 1, 2023, but does apply to any renewal of such a contract. As a result of concerns expressed by several insurers, the Nevada Division of Insurance proposed somewhat of a fix in an effort to prevent (according to the Division) “significant increases in the costs of insuring businesses” and “even higher costs for liability insurance.”
  • As a result of the additions to the law, the law only appears to regulate liability policies issued by admitted insurers, and while it doesn’t require defense cost coverage be unlimited, it does require that defense limits be segregated from indemnity limits. According to one of the new sections of the law, admitted liability policies in Nevada will now be required to state separate defense cost limits on their declaration pages, even if that limit is $0.
  • The Nevada legislation is an evolving concern and is giving rise to continued discussions and potential clarification. Nevada-based policyholders should confer with their liability insurance broker and counsel about their placement and renewal strategy options going forward.
• Final SEC cybersecurity rules: On the heels of the SEC announcing back in March a package of policies designed to protect the financial system against cyber incidents, the commission adopted rules on July 26 to require all public companies to disclose all cyber security breaches within four days after a registrant determines that a cybersecurity incident is material. The disclosure may be delayed up to 60 days if the U.S. attorney general determines that immediate disclosure poses a substantial risk to national security or public safety. Specifically, the rules require these companies disclose the nature, scope and timing of the incident, as well as its likely material impact to their organization. Further, companies will be obligated to describe their processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats and disclose this, along with information about ongoing or completed remediation efforts in their annual 10-K filing.
  • Where the SEC is involved, there are always risks to corporations, their directors and officers which may attract coverage under D&O policies. In relation to investigations by the SEC into possible violations of this new cyber breach disclosure rule, individual insured persons are likely to have broad potential coverage, while corporate coverage could generally be triggered by formal suits or enforcement actions.
  • SEC action against a company and its directors and officers for possible violations of the new rule could lead to derivative suits for failure to adequately oversee cybersecurity and disclosures, while securities class actions could allege that a failure to make a timely disclosure under the new rule is presumptively an actionable material omission. Fortunately, such derivative suits and class actions would likely be covered by most current public D&O policies.
• ESG pressures and backlash: Organizations continue to face pressures to address ESG from operational, cultural and investment perspectives. SEC rules around climate exposure disclosures for public companies were proposed in 2022, rules we do not expect to become final as drafted or without significant litigation challenge. In the meantime, at least two telephone service providers were sued in ESG-related securities class actions. At issue: alleged misrepresentations relating to lead contained in telephone cables.
  • In addition, anti-ESG backlash at state and federal levels has presented conflicting pressures relating both to climate and to diversity, equity and inclusion. Such backlash has included not just legislative efforts to restrict companies from implementing ESG protocols, but also shareholder proposals to limit ESG policies and shareholder litigation. As an example of shareholder litigation, plaintiffs recently filed two lawsuits against U.S.-based airlines in connection with their purported actions supporting ESG-related initiatives. In another shareholder case, the Superior Court for the State of Delaware denied a plaintiff’s books and records demands based on, among other grounds, the board’s lawful exercise of its business judgment in implementing corporate policies.
• Supreme Court to review SEC authority to conduct administrative proceedings: In June 2023, the U.S. Supreme Court agreed to review litigation that assesses the constitutionality of the SEC’s use of in-house administrative tribunals. In the case of Jarkesy, et al. v. Securities and Exchange Commission, the Fifth Circuit held that the power of the SEC to conduct administrative proceedings before administrative law judges, as opposed to bringing actions in federal court, was unconstitutional. If the Supreme Court affirms, the decision has the potential to fundamentally change the way SEC enforcement actions, and administrative agency proceedings in general, are conducted. An opinion is anticipated before the close of the Court’s term in June 2024.
• D&O liability insurance coverage decisions
  • Late notice coverage defense upheld: In coverage litigation involving a university’s use of affirmative action in its admissions program, the First Circuit Court of Appeals affirmed the lower court’s determination that the college’s failure to give timely notice of the claim to its excess carriers forfeited any right to coverage it may have had from them [NOTE: THE PRIMARY CARRIER EVIDENTLY PAID ITS LIMITS]. President and Fellows of Harvard College v. Zurich American Insurance Company (August 2023)

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

---