Ripples of a pivotal Supreme Court ruling. Massive D&O settlements. Near-record numbers of federal securities class action lawsuit filings. Rising defense costs. Fewer publicly traded companies. The #MeToo movement. Thanks to these market trends over the last several years, it’s been an extraordinarily costly year for those who purchase directors’ and officers’ liability insurance.
The world’s top D&O insurers are starting to write less business and charge more for coverage.
Over the last 13 years, thanks to an abundance of capital in the market, both private and public companies have grown accustomed to lower pricing year after year. For example, up until the last two quarters of 2018, if you were purchasing $30 million of D&O coverage, and your program was written in layers of $10 million, the primary $10 million cost approximately 3% to 5% less than the previous year, while the excess limits received even larger premium decreases.
However, in the last four to five months, this has flipped. Buyers are seeing sudden double-digit rate increases in their D&O premiums. With insurers experiencing unsustainable direct loss and defense & cost containment (DCC) ratios, the D&O marketplace is in the midst of a major shift.
In this blog, we list the factors behind the drastic spike in D&O insurance premiums in the last few months and what companies can expect in the future.
Cyan ruling. Last year’s pivotal Supreme Court ruling known as Cyan essentially eliminated protections for defendants in securities lawsuits by allowing plaintiff attorneys to forum shop in more favorable state court jurisdictions. The Court held that state courts retain concurrent jurisdiction over class action lawsuits alleging violations of the Securities Act of 1933 and that those suits are not removable to federal court. The ruling was bad news for companies going public. As we expected, the decision has driven up litigation costs and frequency.
Massive D&O settlements. Thanks to some of the largest class action securities settlements ever paid out in history, like the Wells Fargo settlement of $480 million, the Petrobras $2.95 billion corruption suit, Allergan, Inc., settlement of $290 million and the Yahoo! data breach-related derivative suit, the world’s top D&O insurers have been hit hard with unprecedented payouts. Because of the severity of the settlements, smaller insurers, who are usually shielded from large pay-outs because they don’t write the primary or lower layers of coverage in a D&O tower, suffered losses, too.
More filings, fewer companies. In the 22-year period between 1996 and 2018, the number of federal D&O lawsuit filings has remained fairly consistent, with the exception of a spike in 2001 due to the dotcom bubble burst. However, the number of class action lawsuits nearly doubled in 2018 versus 2015. At the same time, the number of publicly listed companies has shrunk. (See the graph below.) From a D&O market perspective, that means it’s getting more expensive to insure a public company.
Trends in D&O Claim Frequency from NERA Economic Consulting
#MeToo. The #MeToo movement, which encourages victims of sexual misconduct and abuse to share their experiences, has prompted an all-time high in the number of EEOC claims made against private and public companies. Large employment practice settlements are also driving up coverage costs.
AIG is writing less D&O insurance, and others are following suit. Because of the higher frequency and severity of claims, and the adverse development of prior years’ claims, D&O loss costs have continued to rise. In 2017, AIG had a direct loss and DCC ratio of 112.8%. Typically, a loss ratio of about 70% means the insurer is not making an underwriting profit. Under its new CEO of General Insurance and management team, AIG has made the decision to write less business and focus on achieving an underwriting profit. The other top D&O insurers are not jumping in to pick up the additional business, they are following suit by reducing limits offered and also writing fewer accounts.
What to Expect in the Future
Insurance companies —both large and small — will continue to write fewer D&O accounts and charge more. For buyers of D&O insurance, it’s becoming harder to negotiate because insurers are willing to walk away. We’ve experienced situations where insurers are demanding a 10% to 15% premium increase on the primary $10 million layer of coverage, and the first excess layer of $10 million is looking for a 25% increase.
In the coming year, we can expect pricing to rise even further. Public companies buying D&O insurance will likely receive overall program increases in the 5% to 8% range (which accounts for a 9% to 14% increase on the primary layer with smaller increases with the excess layers). Private companies should expect 5% to 10% increases.