Ann Longmore is executive vice president of FINEX North America, a unit of London-based Willis Group Holdings P.L.C. She spoke with Business Insurance Associate Editor Bill Kenealy about the market for directors and officers insurance and the risks shaping that market. Edited excerpts follow.
Q: How is the market looking for buyers of D&O insurance?
A: The market is still looking good. We are still seeing rate increases, but they are mostly in the single digits. This is good news, particularly for smaller and mid-market companies, which have seen double-digit increases for the last two, three or four renewals.
Large public and private companies only began seeing large rate increases in the last year or two, and those could still be minimized by strategically reducing rate on the excess layers, so that the increase on a multilayer program could be completely eliminated. So for the next 12 months, we are expecting some uptick on those accounts, but mostly lower single-digit rate increases.
Q: What about terms and conditions?
A: Terms and conditions are still negotiable. There are lots of new forms coming out. We are getting flooded with them right now. It's also telling that one carrier, (American International Group Inc.), came and said that they would write $100 million of D&O coverage in a layer. We've never seen those limits of that size before.
Q: How are new regulations affecting D&O exposures?
A: The U.S. Securities and Exchange Commission came out with new draft crowd funding regulations just a few days ago. They are almost 1,000 pages long and have to do with the Jumpstart Our Business Startups Act, which was passed in 2012. For companies raising capital via crowd funding portals, this will be very important when the final rules come down the pike. Going forward, a majority of capital raising for companies will be done under the JOBS Act, so we are seeing news regulations that are changing the rules for capital formation in the U.S. This is the most significant and wide-ranging changes to that framework that I will see in my lifetime.
Outside of new regulations, there has been enormously important new guidance from the SEC on its enforcement protocols. It's not new regulations, but public pronouncements by the SEC of who they are going to focus on and what size of violations they are going after. It's seen to be a “broken windows” philosophy. So settlement negotiations may be changing. Since these pronouncements, there have been three large settlements where the SEC is not accepting its old norm of allowing companies to “neither admit or deny” wrongdoing. So it's a much harder, stricter tone from the SEC, so we are suggesting that risk managers and general counsels familiarize themselves with this tone.
Q: What other emerging risks may ultimately affect D&O policies?
A: One we have seen for the last few years is (mergers and acquisitions) risk. We refer to them as merger objection suits. While they have decreased from their high of two years ago, statistical evidence still indicates that over 90% of mergers and acquisitions of all sizes end up having litigation. So the response of the primary carriers has been to adjust retentions on the D&O side so that a higher, separate retention would apply in the case of merger rejection lawsuit.
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