Insurance Marketplace Realities 2025 – Directors and officers liability

Rate predictions: Directors and officers liability

	Trend	Range
Public company: Primary, excess, Side A		-5% to flat
Private company: Primary, excess, Side A		-10% to flat

Underwriting

Public company

• Rate environment: We expect modest rate decreases to continue in the second half of 2024; however, we foresee challenges obtaining decreases with incumbents, particularly on excess layers, where incumbents are likely to hold the line on continued rate deterioration.
• Focus on coverage: As insurers may take firmer positions on continued premium relief, opportunities persist to expand coverage. We recommend that our clients explore the potential for broader coverage during their 2024-2025 renewal cycles.

Private company

• Primary: Insureds with stable risk profiles continue to see enhanced competition, with a floor of flat renewals and decreases when marketed. While decreases may still be available, we don’t anticipate the more drastic rate decreases we saw in 2023. Carriers may also offer guaranteed renewals and multiyear policy terms, with a refreshed annual aggregate. The market for higher risk profiles is improving but can still be challenging.
• Excess: For larger risks, excess markets have maintained recently lowered increased limits factors (ILFs).
• Retentions: For challenged risks, those with large exposure increases and/or claims experience, 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.

Challenged risk profiles

• Non-U.S. parent with U.S. exposures
• Liquidity challenged and pre-restructuring/bankruptcy risks
• Challenged industries, e.g., oil and gas, healthcare, life sciences, higher education, cryptocurrency, cannabis, retail, restaurants, sports/entertainment
• IPOs and SPACs

Despite challenges and anticipated potential for increases, capacity remains available.

Risk profile focus

• Cyber/privacy: Adequacy of disclosures, business dependency, and board oversight
• Financial strength (especially liquidity)
• AI integration and adaptedness
• Management of guidance in the context of inflation, interest rates, among other factors
• Industry
• Claim history
• Loss-cost escalation
• Human capital, labor retention
• Systemic exposures
• Regulatory uncertainty
• Conflicting shareholder/political pressures surrounding ESG practices, including DEI

Industry-specific D&O rate predictions and notes

Industry notes

• Healthcare: As to private/NFP (primary), potentially heightened premium depending on claims activity or M&A. As to private/NFP (excess), potentially heightened premium depending on claims activity or M&A. Also, there is some pressure on antitrust retention and co-Insurance.
• Life sciences: There is still significant downward pressure on premiums but it is dependent on the level of past adjustments. We are still able to achieve retention reductions in some cases. Companies with a recent IPO may see larger reductions in the -20% to 30% range and high IPO retentions are regularly being reduced.
• Natural resources: There has not been meaningful deviation for the natural resources vertical. Anecdotally, we have continued to see robust competition for primary and first excess capacity. Competition for mid- and high-excess layers tends only to be constrained by minimum premiums levels, where applicable.
• Retail & distribution: There has been no meaingful difference in the renewal expectations for retail & distribution clients as compared to what is provided generally for our public company clients. Potential increase in bankruptcies within this sector as we move throughout the year.
• Technology, media & telecommunications: There has been no meaningful difference in the renewal expectations for tech clients compared to what we provide generally for our public company clients.

Developments and market driving issues

• U.S. Supreme Court decisions impacting federal agency rulemaking and enforcement authority
  • In June 2024, the U.S. Supreme Court issued its ruling in the Jarkesy v. SEC litigation, ruling against the SEC in a case challenging the agency's ability to use administrative law tribunals to seek civil penalties against defendants for securities fraud. The court found that, in cases alleging fraud, the agency must bring civil-penalty actions in federal court, where the defendant is entitled to a jury trial, and cannot do so in in-house administrative courts.
  • Days later, the court in Loper Bright Enterprises et al. v. Raimondo, Secretary of Commerce, et al. held that the Administrative Procedure Act requires courts to exercise their independent judgment in deciding whether an agency has acted within its statutory authority. In overturning longstanding Supreme Court precedent from the 1984 decision in Chevron USA Inc. v. Natural Resources Defense Council, Inc., the Court held that courts may not defer to agency interpretation of the law simply because a statute is ambiguous.
  • The Jarkesy and Loper decisions are wins for those who have sought to diminish the scope of regulatory agencies’ rulemaking and enforcement powers. The immediate impact on companies and their directors and officers is less evident, but it is foreseeable that overall exposure may diminish if defendants have greater success in federal court or if the possibility of that reduces the severity of pre-trial settlements. It will also be interesting to see if enforcement proceeding filing frequency diminishes if the SEC, in fact, becomes more scrutinizing in the cases it decides to assert.
• U.S. Supreme Court decision on whether pure omissions can establish Rule 10b-5(b) liability
  • In April 2024, the U.S. Supreme Court issued its opinion in Macquarie Infrastructure Corp. v. Moab Partners. The Court held that a failure to disclose information required by Item 303 in Regulation S-K cannot support a private action under Rule 10b-5(b) as long as the failure does not render prior statements misleading. In order to reach that conclusion, the Court found that Rule 10b-5(b) does not create liability for pure omissions.
  • The decision is a win for companies and their directors and officers, likely to stem the previously rising tide of securities class actions resting on Item 303-related allegations. However, the decision may turn out to be even more of a loss for plaintiffs than might be immediately obvious. In this regard, it seems to call into question the continued vitality of the Court’s decision in Affiliated Ute Citizens of Utah v. United States, a case often cited for the propositions that a claim for liability under Rule 10b-5 can be predicated purely on omissions, and that such a claim doesn’t require positive proof of reliance.
• Securities class action (SCA) filing frequency and severity: SCA filings slightly increased in the first half of 2024, with 112 filings which, annualized, would be 224 filings, as compared to 216 total filings in 2023. Of note is the continued and dramatic decline of M&A-related class actions, from 102 in H2 2017 to only two in H1 2024. The average settlement in H1 2024 was $26 million, reflecting a steady decline from 2023 ($35 million) and 2022 ($40 million). The median settlement in H1 2024 was $9 million ($15 million in 2023, $14 million in 2022). We caution that settlement data in any given year may not be reflective of current D&O market conditions. They are lagging indicators, 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.
• Broader U.S. economy and D&O risk: The broader economy has been resilient. Fears of a recession have diminished, GDP growth has exceeded expectations, and stock market indices have hit record highs. Nevertheless, interest rates, global hostilities, supply chain, labor supply, as well as lingering inflation are factors that continue to weigh on businesses. Chapter 11 bankruptcy filings for the 12 months ending June 30, 2024, were 46% higher than the same period last year. To the extent securities litigation can arise – and has arisen – relative to the adequacy and accuracy of risk disclosures by public companies as to how macroeconomic factors are affecting them, deficient disclosures on these subjects can create D&O exposures.
• D&O risks emerging from artificial intelligence
  • AI – from traditional AI to augmented to fully autonomous AI – presents risks to companies across numerous lines of insurance coverage. As a D&O risk, AI can be used to provide data and support to corporate decision makers, leading potentially to questions as to the adequacy of oversight and due diligence. The adequacy and accuracy of investor disclosures relating to the use and scope of AI are also potential areas of risk.
  • The SEC has initiated enforcement actions, and shareholders have filed securities litigation against companies and their directors and officers relating to alleged practices known as “AI washing” — or the overstatement or the misleading of investors as to a company’s AI capabilities, or the extent to which the company has incorporated AI into its operations or products.
  • To date, the totality of AI-related D&O liabilities is less known but are sure to be areas of further scrutiny, from the SEC and other regulatory bodies, courts, legislatures or otherwise, going forward.
• Cyber as a D&O risk
  • CrowdStrike: In July 2024, organizations across industries grappled with the impacts of the technology outage attributed to the cybersecurity firm CrowdStrike. As a D&O risk, impacted companies that experience a material stock drop may soon see securities class actions and/or shareholder derivative lawsuits relating to disclosures and oversight of systems viability and security. As of this writing, CrowdStrike itself has become the subject of securities litigation but we are not aware of additional filings or agency enforcement activity. We will monitor developments as they occur.
  • WTW has undertaken research into the relationship between cyber and D&O risk. Below are a few key takeaways:
    • Cyber incidents increase the likelihood of D&O claims: the risk of a large public company having a securities class action in a given year goes from 5% to 68% if there is a substantial cyber incident.
    • Cyber incidents often lead to corporate derivative suits which allege that the directors and officers failed to provide sufficient oversight. The majority of the alleged damages in such derivative suits can be mitigated by recoveries from cyber policies, reducing the D&O exposure.
    • WTW analytics suggest growing evidence of a correlation between D&O events and the state of a company’s cyber hygiene as a proxy measure for governance generally.
    • State of the art analytics can be most helpful in designing optimal insurance programs, particularly if they take into account the follow-on exposure which cyber incidents pose to directors and officers.
    • (Source: WTW proprietary data)
  • Recently, several insurers have been willing to offer coverage enhancements for cyber and D&O policies (for example, coordinated retention credit on D&O policies, SEC disclosure costs on cyber policies) which perform optimally when coordinated.
• Fiduciary duties of controlling stockholders (In re: Sears Hometown and Outlet Stores, Inc. S'holder Litigation): In January 2024, the Delaware Court of Chancery addressed duties that a controlling stockholder owes when it exercises its powers as a stockholder – taking actions such as seeking to remove directors or enacting bylaw changes. In a first-of-its-kind decision, the court introduced a framework designed to help determine when fiduciary duties are owed by a controlling stockholder and to better define the boundaries of those duties. The decision is crucial to controlling stockholders, such as private equity funds, to the extent their actions may require additional analysis of whether newly articulated duties have been satisfied.
• Final SEC rules relating to SPACs and de-SPAC combinations: In January 2024, the SEC adopted final rules to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (“SPACs”) and in business combination transactions involving shell companies and private operating companies (i.e., “de-SPAC combinations”). In so doing, the SEC adopted disclosure requirements pertaining to SPAC sponsors, conflicts of interest, stockholder dilution, and board determination and fairness of the transaction to SPAC investors. The new rules also clarify and provide guidance related to potential liability relating to these disclosures. A sharp downward trend in SPAC IPO activity began in 2022, in part due to emerging SEC scrutiny into SPACs and de-SPAC combinations, including the issuance of draft rules. With final SEC rules now in place, we will monitor the extent to which private companies will continue to see de-SPAC combinations as a viable alternative to other avenues for going public, including traditional IPOs.

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

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John M. Orr

D&O Liability Product Leader
FINEX North America

email Email phone +1 415 955 0196

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Lawrence Fine

Management Liability Coverage Leader, FINEX North America

email Email phone +1 212 309 3623

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