Woodruff Sawyer’s 2022 D&O Looking Ahead Guide forecasted pricing relief on the horizon. This forecast turned out to be accurate, making 2022 renewals much less painful than 2021 renewals.
During the first six months of 2022, pricing trends flipped from where they were in the second six months of 2021. In the first half of 2022, 69% of Woodruff Sawyer clients experienced a premium decrease—quite a dramatic shift from the 70% of clients whose premiums rose in the second half of 2021.
Looking at 2023, we see opportunities to lower self-insured retentions (similar to deductibles) for D&O insurance programs—a welcome change from the one-way ratchets we had been seeing for the past several years.
Despite these positive trends, many insurance buyers continue to face pricing challenges. Our webinar panel of experts recently reviewed trends that affected D&O insurance over the past year and offered their insights to help you plan for 2023.
Changes In the D&O Insurance Market
Although there were signs last year that the US market was in transition with pricing relief on the way, Seth Pfalzer, Senior Vice President, Northern California Management Liability Practice Leader, noted, “The speed with which the market turned was a surprise, and the impact is going to be felt well into 2023.”
Decreases in premium pricing was most significant for the same organizations that were hit hardest by the increasing D&O insurance pricing trends of the past few years. These companies include life science and technology companies. IPO public companies were also hit hard, primarily due to the increase in Section 11 cases filed in state and federal court after the Supreme Court’s 2018 Cyan decision.
Concerning self-insured retentions, Pfazler said, “Mature companies were not hit as hard on the retention front during the hard market.” As a result, “most [self-insured retentions for mature public companies] will stay flat in 2023, although some may have a chance to bring their retentions down.
|“I’d note that 90% of the underwriters predicted in Looking Ahead that retentions were going to stay the same or go down, which in and of itself is a major shift [compared to prior years].”
IPOs: Opportunities to Lower Self-Insured Retentions
Seth Naterman, Account Executive, Management Liability, emphasized that there are opportunities to lower self-insured retentions for D&O insurance programs for the first time in several years.
“We’re just in very favorable renewal terms for companies that have gone public in the past couple of years,” Naterman said. “Of course, for companies that are struggling with their business plans, trying to execute after some risk-specific issue, or somebody with claims, renewals are a little bit more challenging. But overall, pricing is really decreasing.”
It’s important for companies to secure lower self-insured retentions where they can, according to Naterman. At the time of the claim, that’s real money in somebody’s pocket if they’re not having to retain that risk. And so, while it doesn’t come through on the cash flow upfront, it really is effectively a decrease in premium as well.
“It (the decrease) certainly makes the programs much more efficient. These programs are still very expensive compared to historical norms. But there’s no doubt that clients are excited about the relief.”
How Market Capacity Impacts Rates
Not surprisingly, new insurance carrier entrants were attracted to last year’s pricing environment. Many new facilities rushed into the space, greatly increasing the supply of D&O insurance compared to the immediately prior years. However, the sharp decrease in IPOs and SPAC deals in 2022 has forced incumbents and new entrants alike to compete fiercely on renewal business.
“It’s a pretty simple function of supply and demand, frankly,” said Lauri Floresca, Senior Vice President, Cyber Liability. “And I think you know we hit both sides of this as rates trended up over the last few cycles.
“We had new carriers coming into the market. We had existing carriers who suddenly expanded their appetites… And then, of course, in 2021, we had such a robust IPO market, so it was really a perfect storm for rates to keep rising during those last two years.”
|How are the changes in market capacity impacting rates? We’ve seen drastic improvements in D&O premiums in 2022. In 2022, the median increase was just 8%. This percentage compares with median increases of 31% in 2019, 38% in 2020, and 14% in 2021.
Hot Topics In D&O Insurance
Next, the webinar panelists examined the following “hot topics” affecting D&O insurance.
The Declining Rate of Securities Class Action Lawsuits
The overall rate of securities litigation declined for the third year in a row.
However, Priya Huskins, Senior Vice President, Management Liability, emphasized that this decline is not evenly distributed. “We continue to see a high rate of litigation against new public companies, and I do mean IPO direct listings and de-SPAC transactions,” Huskins said. “IPO companies continue to be sued at a historic high rate.”
A Rise in Expensive Settlements
Although D&O insurance rates are declining, costs are escalating for D&O litigation. Top securities defense attorneys are charging for than $2,000 per hour. Additionally, D&O insurance carriers are paying settlements that exceed the 10-year average.
Boards React to Economic Changes
Throughout the past year, boards continued to try to brace for a possible recession. “After a decade of good times—COVID aside, which was terrible for many, many reasons—there is this issue of having management teams that may not have dealt with persistent inflation and recession,” Huskins said.
She mentioned that companies will have to “steer the ship through some very rocky shoals,” with smart management teams focusing on forward-looking statement safe harbors.
|Despite these economic concerns, the outlook may not be as grim as we had feared. In our December State of the Industry webinar with Nasdaq, we discussed inflation, recession concerns, unemployment, IPOs, and when the economy may rebound.
Environment, Social, and Governance (ESG) Risk
Pfalzer discussed the emerging area of litigation risk involving ESG and the SEC’s new proposed climate rules.
The proposed rules will require additional disclosure statements that “are going to open and expose areas that were not there prior, and those statements can be challenged as inadequate or misleading, following any time of any type of climate event,” Pfalzer said. For example, inaccurate metrics around emissions could give rise to litigation.
D&O Insurance Captives: Delaware’s New Law
According to Floresca, one of the most interesting recent events involving D&O insurance is the change in Delaware law to allow companies to use captive insurance companies to indemnify their directors to settle derivative lawsuits.
Since the February 2022 change, a properly designed D&O insurance captive put into place by a Delaware company can respond to non-indemnifiable “Side A” loss. “This is a real game changer for companies who have strong balance sheets and also the stomach to establish a fund captive over a long term,” Floresca commented.
Insurance Underwriters Weigh In™ Survey
Thirty-nine of the world’s top D&O insurance carriers responded to the sixth annual Woodruff Sawyer underwriters market survey. Here are some of the highlights:
- 94% of underwriters expect D&O premiums to stay the same or decrease in 2023.
- 82% of underwriters think companies should be more worried about shareholder litigation in 2023.
- 34% of underwriters think companies are willing to go to trial (and not settle) in the right circumstances.
- 37% of insurance underwriters think the CEO is the most critical person at a company for mitigating D&O risk.
Before concluding the webinar, the panel experts shared some final thoughts on the D&O insurance market for 2023. Here are some of their insights on when the market will turn again.
“Hard markets are usually short and steep, and soft markets are usually long, as we kind of bleed off a capacity that decides to exit,” Floresca said. “Now, this one has been both sharper on the upside and steeper in this first round of it, so maybe it’ll be shorter than some.
“Not all of these insurers are going to make it. There’s not enough business right now to support them…Those ones need that revenue to keep the lights on, and if they don’t have it, (they will) probably exit faster than the traditional insurance companies.”
Naterman said he couldn’t put an endpoint on current market conditions, adding, “But I do think that we’re going to continue to see some pressure on rates into the next year.
“One of the things to think about when we talk about markets is (when) the transactional environment opens back up and becomes like it was in the past, I’m not sure that the IPOs and the SPACs will come back (enough) to provide this flood of new business that’s going to help support everyone.”
On a more positive note, Naterman discussed the importance of underwriting meetings. “I just don’t think you can understate the importance of the underwriting meeting,” he said. “The insurers are the ones who are going to take the risks, so they (should have the) chance to ask questions and know that management was engaged and candid with them…I do believe it’s important to leave the underwriters with some sort of investor-style presentation.”
|For more information on how you can be ready for your next D&O renewal, read the 2023 D&O Insurance Trends: A Looking Ahead Guide, watch the webinar video, and subscribe to the D&O Notebook.
Woodruff Sawyer’s Annual State of the Economy Update is presented by Nasdaq’s Chief Economist Phil Mackintosh and Head of New Listings Jack Cassel, in conversation with Woodruff Sawyer’s Priya Huskins.
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