In Woodruff Sawyer’s eighth-annual edition of the D&O Looking Ahead Guide, we detail what’s happening in the D&O insurance market to help you prepare for your 2021 renewal. You are also invited to our webinar on this topic, which was held in September. You can watch it here.
Even without the pandemic and global economic uncertainty, the D&O insurance market has been challenged. Unfortunately, this is a trend that will continue in 2021.
Excess layer pricing is on the rise, carriers are cutting capacity, and some companies are seeing self-insured retentions increase between 50% and 100%. Of course, premiums are growing, too, with the median premium increase for our clients regardless of size or industry at 28%.
Trends Impacting D&O Insurance Premiums
What is causing this hard market? Litigation and settlements are key contributors. Securities class actions reached an all-time high in 2019 and derivative suits are on the rise—both are settling for large dollar amounts.
To put this in context, the 2019 median cash settlement of $13.6 million was well above the 10-year average of $8.3 million. Over the past five years, notable derivative suits have paid out more than $1.4 billion in cash settlements. In 2020 alone, we saw a record-breaking settlement upwards of $286 million with American Realty.
Adding fuel to the hard market fire are potential future losses from a large number of open securities class actions (about 600), and the uncertainty around the ongoing pandemic.
Specifically, D&O insurers are concerned about directors and officers making decisions and releasing public statements about a future more beyond their knowledge and control than usual. If things don’t go as planned, the bets made and risks disclosed in SEC filings will inevitably be challenged in court by disappointed shareholder plaintiffs.
Emerging Director and Officer Risks
Looking ahead to 2021 also requires being aware of the hot topics like COVID-19 risk, bankruptcy, and politics/ESG in the boardroom, to name a few.
As companies plan for 2021, they are considering the long-term impact of the pandemic and will continue to update their disclosures on the impact of COVID-19. For some, these updates will be reframing revenue guidance. For others, they will have to inform shareholders about fundamental economic shifts impacting the business. Failure to get this right will lead to director and officer litigation.
Personal and corporate bankruptcy filings have been significant in 2020, and this unfortunate trend will continue in 2021. When faced with a short and financially distressed runway, some directors will want to resign from the board. This may or may not be a good idea depending on the situation. All directors and officers facing potential insolvency will want to make refinancing or liquidation plans sooner than later. Doing so will help them avoid the most common mistake, which is failing to realize how much time and money it actually takes to get through a Chapter 11 or Chapter 7 bankruptcy.
Civil unrest and social justice have been key themes in 2020. We are now starting to see shareholders file breach of fiduciary duty suits against the boards of major corporations for failing to live up to their diversity commitment disclosures. The reality is that a corporation’s approach to social, environmental and governance issues is increasingly important to stakeholders––not the least of which is institutional investors like BlackRock, which announced that environmental sustainability would now be a cornerstone of its investment approach.
Take a Deeper Dive into 2021 D&O Insurance Trends
You can get more insights into what to expect for the 2021 D&O insurance market by downloading the guide and/or attending our upcoming webinar (more details below).
Our 2021 edition of the D&O Looking Ahead Guide covers all of these topics in this article and more, including:
- What the premium increases actually mean for you
- More hot topics, including the latest on securities class actions and derivative suits
- Our survey of 34 insurance carriers with whom we place D&O insurance around the world, which gives perspectives on the current risk environment, risk appetite, and future pricing expectations
- Additional insights on the renewal process, minimizing D&O insurance costs as companies go from private to public, Side A-only programs, representations and warranties insurance, foreign filers and D&O insurance, consumer privacy laws and cyber risk, and claims and self-insured retentions.
Get instant access to the full interactive guide below, or download the pdf.
Last year’s guide predicted a lot of what is happening in the current market. Don’t miss out on the insights our latest D&O Looking Ahead guide will provide for 2021.
Have questions regarding your D&O insurance renewal?
Please contact us with any questions or comments at LookingAhead@woodruffsawyer.com.
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