The Directors & Officers liability (D&O) insurance market has been in a state of flux for the last few years.
Rates have been rising at double-digit rates, and capacity within the market has decreased. However, recent months have seen a shift in the market conditions. D&O insurers are loosening their belts, and rate increases are slowing down.
This is good news for businesses that need D&O insurance coverage.
In this article (and video), we explain the current Directors & Officer's Insurance marketplace and what it means for your business...
Current Directors & Officer's Insurance Rate Increases
There are many reasons why D&O insurance rates have been on the rise in recent years.
One reason is the increased frequency and severity of securities class action lawsuits. These lawsuits can be very expensive to defend, and they often settle for large sums of money. As a result, D&O insurers have had to pay out more in claims than they have in the past.
Another reason for the rising rates is the increasing cost of regulatory investigations. These investigations can be very costly and time-consuming, often resulting in fines or other penalties. D&O insurers have had to pay out more in claims as a result of these investigations.
Finally, the current economic environment has been tough on D&O insurers. The stock market has been volatile, and there have been many high-profile corporate bankruptcies. This has led to increased losses for D&O insurers.
DOWNLOAD: Guide to Directors & Officers Insurance
D&O Insurance Rate Trends
In particular, rate increases have moderated—especially for publicly traded companies. According to industry data, rates increased by an average of 3% among such companies during the first quarter of 2022, decelerating from a 10% jump and a 6% rise in the third and fourth quarters of 2021, respectively.
Taking a closer look at these trends, renewal pricing for primary and lower excess layers of D&O insurance coverage has ranged from flat to single-digit increases so far this year. In contrast, pricing for mid and high-excess layers has mostly decreased.
Furthermore, the capacity for higher excess layers has been rising, resulting in increasingly competitive market dynamics. While the D&O segment has also stabilized for private and nonprofit companies, these companies are still deemed high risk by insurers compared to their publicly traded counterparts.
Thus, rates for these companies have increased by an average of 5%-20% in the first half of 2022, according to industry data.
Even as market conditions change, it’s important to note that policyholders operating within challenging industries possessing poor loss history or utilizing insufficient risk management measures could face ongoing coverage difficulties.
New market entrants
Amid increasing capacity and decelerating rates, insurers’ overall sentiment toward the D&O market has shifted. Looking ahead, insurers are poised to fuel further segment growth, as evidenced by several new entrants in the market and, subsequently, greater competition.
In order to secure market shares, some D&O insurers have broadened their underwriting appetites by quoting additional layers of coverage and undercutting competitors to attract new business.
Cyberattacks continue to increase in both cost and frequency, sometimes leading to litigation and related D&O claims. After all, the decisions made by companies’ senior leaders are often intensely scrutinized following cyberattacks.
Potential D&O losses can arise from allegations such as senior leaders failing to take reasonable steps to detect and prevent cyberattacks, report these incidents or notify the appropriate parties.
Compounding D&O risks stemming from cyberattacks, the U.S. Securities and Exchange Commission (SEC) proposed changes to its existing cybersecurity disclosure requirements for publicly traded companies
on March 9, 2022. These changes include enhanced and standardized rules regarding cybersecurity governance, strategy, risk management, and incident reporting. Going forward, adopting these changes could result in further litigation and associated D&O losses for affected companies.
Environmental, social, and governance (ESG) issues
ESG activism has also made a noticeable impact on the D&O market. Specifically, extreme weather events have contributed to a surge in climate change litigation, with many allegations claiming companies and their senior leaders have failed to adequately disclose the material risks of climate change or take action to ensure eco-friendly operations.
Adding to these concerns, the SEC proposed changes to its climate change disclosure rules for publicly traded companies on March 21, 2022. Such changes require companies to share further information on their climate-related risks, associated mitigation measures, and greenhouse gas emissions.
If adopted, these changes could contribute to increased climate change litigation and subsequent D&O claims for impacted companies.
Here are a few tips for purchasing Directors & Officer's Insurance at the most competitive rate in the market:
- Examine your D&O insurance program structure and limits alongside your insurance professionals to ensure they are appropriate and take market conditions and trends into account.
- Keep your senior leadership team actively involved in monitoring workplace cybersecurity threats.
- Work closely with your senior leadership team and insurance professionals to identify and address any ongoing risks that could lead to D&O losses.
By investing in director's and officer's insurance, you can safeguard your company against various risks - giving you peace of mind and allowing you to focus on what's important: running your business.
The point here is there is a whole package of insurance coverages that you need to at least consider in order to protect the sustainability and profitability of your business, director's & officer's insurance being a big part.
We can help.
If your current insurance professional has never addressed issues like this with you before, then I’d encourage you to reach out to us today.
- You can call or text us at 518.960.6600
- Click here to contact us via email.
I look forward to introducing you to a new way of viewing your insurance program.