WTW’s Financial, Executive & Professional Risks (FINEX) Practice collaborates with professionals throughout the directors’ and officers’ (D&O) liability insurance industry to gain perspective into the many facets of our business. In our “D&O Professionals Series,” we feature professionals from various corners of the industry, from executive D&O underwriters to securities litigators to coverage counsel and others. Our objective is to discuss how ever-changing conditions in the broader economy and in business have impacted D&O risk, securities litigation and our industry more broadly.
In this edition, we feature Anthony Tatulli, Head of Executive and Professional Lines for North America at Berkshire Hathaway Specialty Insurance.
WTW: Looking ahead, what is your short-term and long-term D&O market outlook?
Anthony Tatulli (AT): While the market two years ago moved from a “hard” market to a “soft” market, skipping what is typically a period of stability in between these market cycles, our short-term market outlook is that D&O rates are at an inflection point and we’re now moving toward market “stability” and will likely experience that for the next couple of years. We’d define stability as an insured’s policy terms and premium being predominantly determined by its risk metrics and performance as a risk and less by the overall supply of carrier capacity.
Our longer-term D&O market outlook is that we will see a material increase in rates after the end of the market stability period. Primary factors driving our outlook are the backlog of pending securities claims, an inflation of litigation outcomes, an increase in the rate of companies filing for bankruptcy and a myriad of macro-economic and geopolitical factors creating stock market volatility and financial uncertainties. We are already beginning to see these issues impact segments of the market. We have seen a dramatic increase in the number of private companies experiencing financial distress and/or filing for bankruptcy protection and the market for these types of risks has become extremely conservative. We have also seen market conditions tighten for certain high-risk industries such as higher education, healthcare, emerging technology and renewable energy with carriers dramatically reducing their underwriting appetites within these industries.
Accordingly, we expect risk differentiation to be of increasing importance as carriers analyze portfolio performance and profitability across industries and business segments (i.e., private/not-for-profit, commercial/financial institutions, established versus IPO/de-SPAC companies). Therefore, we expect that risk differentiation and market stability will accelerate a flight to quality in brokers and customers selecting their management liability carriers.
WTW: Have there been notable changes in buying patterns for insureds, such as increases or decreases in limits or retentions, conversion to Side A only coverage, utilization of captives or other risk transfer vehicles?
AT: Across all market segments, we’re seeing a general uptick in customers purchasing additional ABC and Side A DIC limits, in part due to cost savings realized in prior softer market years along with a perceived increased in the exposure environment.
In the large non-profit and private company D&O segment, we’re seeing more insureds buy or increase limits for Side A only DIC coverage as they realize the breadth of entity coverage that’s provided in their primary contract potentially impacts the amount of coverage available to individual insureds. In addition, the notable rise in the frequency and severity of bankruptcy related claims, has a similar impact on the private companies.
In the public commercial segment, we’re seeing an increase in customers seeking options for entity investigation coverage, revisiting the ability to “buy down” retentions and as more organizations continue to expand globally, we’re seeing a renewed focus on multinational programs with more customers electing to put a local underlier structure in place on their Primary ABC or Side A layers.
Finally, while we’re seeing customers increase their overall insurance towers, limits management in the carrier community remains a trend and area of focus for established carriers. We continue to see $5 million and $10 million blocks of capacity as targeted line sizes and the market has remained disciplined against moving back to the $20 million or $25 million blocks of capacity that were more common five to ten years ago.
WTW: What makes for an effective meeting in the current environment? If you were to attend a meeting now, what would you want to hear from insureds?
AT: The most effective meeting takes place in a setting that allows for a two-way exchange of questions and answers between the customer and the carrier, including in certain situations a carriers’ claims representative. Preferably in person, but over video with cameras on also works when circumstances don’t allow for in person. One on one meetings are highly preferred and most effective when we’re a primary carrier and for new business opportunities where we are a strong primary carrier contender. As for content, we like to hear from the insured what they believe to be their greatest risks and near-term exposures and their strategies for risk mitigation and expected performance taking into consideration the risks and broader environment. Ideally, we will provide a list of specific questions in advance of the underwriting meeting that allows the customer to prepare appropriate answers and so that the customers can arrange to have the appropriate people attend the underwriting meeting. In certain situations, we suggest that brokers and customers consider inviting a representative from the companies’ board (i.e., a lead director, audit chair, board chair, etc…) as a meeting participant.
Particularly in situations where information is publicly available, corporate governance and enterprise risk management continue to be increasing areas of focus for us. We are also interested in hearing how macro-economic, social and operational issues are impacting the customer and how they uniquely address these issues.
In circumstances where the only possibility for a meeting is in a group setting, the most effective meetings are when all carrier participants submit questions in advance of the meeting and where the customer addresses these questions as part of any presentation.
WTW: Are there any emerging exposures across public or private D&O causing profitability pressures?
AT: The lack of balance between claim dollars being paid on the inventory of traditional class action suits versus premium volume aside, problematic exposures include: bankruptcy/financial distress, anti-trust, conflicts of interest in acquisitions/transactions, controlling shareholder situations and “event-driven” operational and safety exposures. At the top of the list of emerging potential exposures are: artificial intelligence, cryptocurrency and cyber/privacy related risks.
Further, within the public company segment, we’re concerned by how certain of the above referenced exposures are evidencing themselves in material standalone shareholder derivative litigation. “Mega” derivative settlements continue to increase in frequency and severity (not just “tag-along” cases) with over thirty notable settlements greater than $50 million (with half of them occurring since 2020) and over fifteen settlements greater than $100 million. Examples of “event-driven” exposures behind shareholder derivative litigation are health and safety issues caused by product failures related to such things as opioids, food quality, pipelines, power lines, airplanes, data breaches and privacy along with failure of policies and procedures associated with conflicts of interest, ESG, FCPA, etc.
D&O causes of loss impacting the private/non-profit segment have remained relatively constant, with the five major loss drivers being bankruptcy/financial distress claims, antitrust or anticompetitive claims, minority shareholder claims, regulatory claims, and contractual claims. The biggest change to these exposures has been in their increased frequency and severity. By way of example, bankruptcy trustees have made a routine practice of going after individual directors and officers in attempts to recover the entire D&O tower; large private companies have larger shareholder bases and there has been a large increase in the number of claims brought by minority shareholders alleging breach of fiduciary duty; and large private companies and non-profit organizations continue to attract more regulatory scrutiny over anticompetitive practices.
WTW: What do you envision the securities litigation environment looking like in the next 12 to 18 months?
AT: It appears we are experiencing a “new normal” in the filing rate of 10b-5 securities class actions (“SCAs”). With an increase in the number of plaintiff law firms focusing their attention in this area, we’ve seen an uptick in the average annual federal SCA counts with recent years generating 200 to 215 SCAs compared to the historical run rate of 150 to 175 per year. Given an increasingly complex macro-economic and geo-political environment fueling stock price volatility along with increasing shareholder activism and regulatory scrutiny, we see plenty of fertile ground for the plaintiffs’ bar and therefore expect SCA and shareholder derivative filings to remain at elevated levels.
As mentioned above and in part due to the success of the plaintiff’s bar related to recent large shareholder derivative settlements, we expect plaintiff firms to continue to test the Caremark standard around board oversight and the appropriateness of board actions taken for “mission critical” business operations. We also expect continued creativity from the plaintiff’s bar as they explore such things as theories of loss valuation based on a company’s loss of “institutional value” versus loss measured by change in market capitalization applied across various types of securities litigation and utilization of Books and Records Demands to improve litigation outcomes.
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).
This article may contain information or materials created or provided by third parties over whom Willis Towers Watson has no control or responsibility. These third-party information or materials are not under Willis Towers Watson’s control, and Willis Towers Watson is not responsible for the accuracy, copyright compliance, legality, or any other aspect of such third-party information or materials. The inclusion of such third-party information or materials does not imply endorsement of any third parties by Willis Towers Watson or any association of Willis Towers Watson with any third parties.
