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D&O liability insurance market remains competitive with ample capacity

Primary pricing may increase, but ample excess capacity in place


The directors and officers liability insurance market remains a buyers' market, with competitive prices and ample capacity.

While primary pricing may be hardening somewhat, it is being offset by continued softness in the excess layers, observers say. Many estimate there is more than $1 billion in available capacity, and absent an unforeseen event, this situation is unlikely to dramatically change for the foreseeable future.

Observers also note that there are some relatively new players in the market, which has contributed to its softness.

“We're still definitely in a buyers' market,” said Brenda Shelly, New York-based D&O practice leader for Marsh L.L.C.'s FINPRO unit.

Rates on programs are decreasing overall. “We're seeing signs that could accelerate as we head into 2015,” said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.'s D&O professional liability division. “The market seems to be shifting and getting more competitive on both primary and excess.”

“Competition over the last few months has been on the uptick, with new entrants making a significant push to gain a material foothold into the D&O market,” said Steve Boughal, New York-based vice president and chief underwriting officer of Hartford Financial Products, a unit of The Hartford Financial Services Group Inc. “That's creating some pricing pressure.”

“There might be small pockets of industries that have tougher times,” but generally the market is very competitive, said Andy Doherty, New York-based executive vice president, for Willis North America Inc.'s FINEX unit.

Smaller biotech companies, for instance, are having more difficulty than other industry sectors getting placements that are competitive. They eventually do so, “but it's a struggle,” Mr. Doherty said.

John Phelps, director of business risk solutions at Jacksonville, Florida-based Blue Cross Blue Shield of Florida Inc., whose D&O insurance renews in February, said one D&O issue of concern is cyber risks. D&O insurance is “being seen as a second bite at the apple” by plaintiff attorneys, and D&O coverage “is in play for the cyber exposures,” said Mr. Phelps, who was 2013 president of the Risk & Insurance Management Society Inc.

“To date, the claims environment has been mostly favorable,” Mr. Boughal said. “There are a few large claims that have surfaced that will give some ill-positioned carriers some pain, but for the most part the marketplace is faring relatively well based on the current inventory of D&O claims.”

“There aren't systemic issues in the claims inventory, and there's nothing foreseeable (with regards to that) on the short-term horizon,” he said. “Primary pricing may be plus or minus a few percentage points, depending upon the account. The lower excess layers are seeing some pricing pressure,” with lower rate decreases of up to 5%, while the higher excess layers may be seeing pricing decreases in the 5% to 10% range, he said.

Christopher Casper, Chicago-based senior vice president for Lockton Cos. L.L.C., said primary markets are “usually trying to get between 5% and 10%” in rate hikes, although “most of the primary placements are coming in close to flat.” But because of competition in the excess market, rates overall are flat or even down about 5%.

Brian Wanat, New York-based CEO for the U.S. financial services group at Aon Risk Solutions, said rates in the primary market are tighter because “you're closer to the fire” in terms of the risk.

In addition, many claims involve legal fees, and those are more likely covered by the primary policies. Furthermore, the excess business has been profitable for most insurers, he said.

Private company D&O

Observers say buyers of private and nonprofit D&O insurance are also facing a soft market. Rates in that segment, however, are “going up just a little bit more,” in part because the policy forms are a little bit broader, including entity coverage, and some also include a duty to defend, Mr. Wanat said.

Mr. Norton said that segment of the market may still be seeing some firmness, perhaps because private companies buy lower limits and may buy only a primary layer, so they are not affected by the decreases in the excess layers.

Making a distinction between the private and nonprofit sectors, Mr. Boughal said “you're still seeing some single-digit rate increases” in the private segment. “In the nonprofit D&O world, you're seeing flat pricing for the most part.”

Bertrand Spunberg, New York-based executive risks practice leader for Hiscox USA, said this segment of the market has a “split personality.”

For those parts of the market that are less profitable, including California, or are in more challenging classes of businesses, insurers are increasing retentions and pushing rates.

But insurers are charging less for accounts deemed more profitable and are being “extremely competitive and broadening terms quite aggressively,” he said

Timothy Crowley, director at Crystal & Company, said the U.S. Supreme Court's ruling in Halliburton Co. v. Erica P. John Fund Inc., in which the high court ruled corporate defendants must be given the opportunity to show their actions did not affect the stock price of a publicly traded company before a class is certified, did not have a significant impact on the D&O market.

“We're probably still going to need one or two other seismic claims frequency and claims developments to really shake up the market,” he said.

“We don't see the market changing that much over the next couple of years,” Mr. Wanat said. “We continue to see it being very much a buyers' market.”

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