What’s driven a D&O capacity influx?

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What’s driven a D&O capacity influx? | Insurance Business America















Dozens of insurance companies have flooded in

What's driven a D&O capacity influx?

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Over the past 12 months, D&O coverage has experienced a growth in capacity with 32 carriers having entered the fray in 2022, according to Gallagher.

The boom has been attributed to a few factors, including:

  1. Rates for policies were quite favourable
  2. Claims were decreasing
  3. Retentions that insurers were getting were increasing, leading to the associated risk to insurers a less burdensome

“Alongside an increase in capacity, there was also an inpouring of private equity into the marketplace,” said Jennifer Sharkey, managing director for management liability at Gallagher.

During an interview with Insurance Business, Sharkey spoke about how the new businesses writing D&O policies made pricing more competitive, the types of claims that are posing a concern for insureds and insurers, and the challenges of ESG initiatives.

32 new carriers enter the marketplace

The 2022 influx of 32 new carriers into the marketplace opened up capacity for D&O insurance considerably.

“What resulted was significant rate decreases from 2022 to this year,” Sharkey said.

However, the rate decreases have slowed down considerably.

“The much more competitive programs and products are seeing smaller decreases, while clients who are entering the renewal phase from coverage written before this capacity boom are witnessing significant shrinkage,” Sharkey added.

While the increased capacity is a favourable market trend for purchasers of D&O coverage, insurers that have traditionally offered this product are having to succumb to new pricing trends as a result.

Since there are not may new businesses popping up anymore, insurers have to retain the business by being more diligent on upkeeping renewal books.

“As these new companies have entered the market with more competitive rates, traditional insurers are having to adjust theirs in order to keep the D&O segment of their business afloat,” Sharkey said.

Furthermore, these new insurers come without the baggage of any legacy claims, which guarantees that the rates can be aggressively priced.

More established companies and corporations are choosing to comply with this market trend because, as Sharkey opined, “they don’t want to turn away from the premiums.”

The claims that just won’t quit

Insurers who are providing coverage for publicly traded companies are becoming increasingly aware of Fortune 1000 derivative claims, which are proving to be problematic.

“These tend to be Side A claims, so sometimes the deductible doesn’t apply,” Sharkey said.

The settlements for these claims can be quite significant, especially if they are paid out in cash. This has proven to be a concern from a loss prevention angle, as derivatives have shed new light on D&O liability insurance.

Bankruptcies are also providing hardships for insureds and insurers alike. However, this type of loss does not lead to claims right away, as there is a prolonged outcome as the logistics of the filing are sorted out.

“In the future, whether it’s a year or two, we will have a clearer picture of what losses were incurred,” Sharkey said. “But we’re just seeing an awful lot of filings right now, so that’s something to watch out for.”

“You’re damned if you do, damned if you don’t”

Another topic that is relevant to the discussion of directors and officers is ESG, especially as it pertains to certain malpractices at the executive level.

“You’re damned if you do, damned if you don’t” Sharkey said.

If you do not write ESG-related initiatives into a coverage, there is significant blowback, and for those who are adopting it, there is constant criticisms towards omissions.

When it comes to trends related to ESG and directors and officers, there have been claims arising around diversity boards, as well as greenwashing practices in relation to environmental work.

The U.S Securities and Exchange Commission (SEC) will be coming out with more guidelines around ESG in October, which will give businesses and organizations some more insight on what they can expect when adopting this initiative.

“In the meantime, companies are just trying to pivot and be really cautious about their ESG disclosures to avoid any further litigation or ridicule,” Sharkey said.  

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