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Merger objection lawsuits driving D&O rates up

Posted On: Oct. 9, 2018 7:00 AM CST

Merger objection lawsuits driving D&O rates up

COLORADO SPRINGS, Colorado — Merger objection lawsuits are raising some concerns about rates and capacity in the directors and officers’ liability market for large buyers.

Dissatisfied shareholders of soon-to-be or recently acquired companies have increasingly filed merger objection lawsuits, which is having an impact on the D&O market, experts say.

“In an economy that’s characterized by high activity and growth and acquisition … the D&O space and merger objection claims are an increasing dynamic that’s having a negative impact on public companies and public D&O cover,” Matthew Dolan, president of North American specialty for Liberty Mutual Insurance Co. based in Simsbury, Connecticut, told Business Insurance last week on the sidelines of the Insurance Leadership Forum, sponsored by the Council of Insurance Agents & Brokers in Colorado Springs, Colorado. “We’re watching that pretty closely.”

“It’s the experience that’s coming through, the activist investors out there that are driving the losses,” said Paul Horgan, Zurich Insurance Group Ltd.’s head of North America commercial insurance in New York. “When you’ve got a large market cap, it doesn’t take a lot of movement to create potential liability.”

This trend has led to some firming in the large account space, said Mike Rice, executive chairman of JLT Specialty USA, based in Denver.

“There have been some big claims on the A-side, unprecedented claims as far as size,” he said. “What used to be viewed as a really nice stop-gap product, now there’s some teeth behind it.”

With D&O coverage, “I think you’re seeing a tale of two cities,” Mr. Horgan said. “The large accounts space continues to be one that’s challenged on profitability. I think you’ll see underwriters pushing for rate or terms on that. In the middle market, there still tends to be a lot of competitors out there. While the profitability has become a bit more challenging in that space, there is still a lot of capacity, a lot of people trying to diversify into the middle market. I think you’ll see continued pressure on the larger side and probably more stability on the middle market (side).”

The D&O market is operating at all-time highs in terms of claims frequency, while severity continues to go up, Mr. Rice said.

“Inflation doesn’t seem to go away as far as the size of claims,” he said. “When you couple high frequency with high severity in a market that’s probably lost 65% of its rate in the 2000s, it’s ripe for change.”

“I haven’t seen declinations in D&O in 10 years, and we’re seeing declinations,” he added.

But the D&O market remains “very competitive,” said Tom Fitzgerald, chief executive officer of Aon PLC’s global broking division in Chicago.

“There are certain industries inside the financial lines world that are experiencing worse claims results that then translate into worse underwriting results, and that’s pushing for greater rate,” he said. “You can’t just broad-brush D&O, because D&O remains very competitive with the notion that a lot of people want to write it. (Financial institutions is) a difficult industry, fraught with regulation. It can be an easy target.”

Cyber and property coverages

Cyber also continues to dominate conversations as both the risk and product solutions expand, with a key unresolved question being whether cyber should be solely a stand-alone product or continue to be intertwined with other coverages.

“Cyber is an interesting one because while the market is soft, the coverage just keeps evolving,” Mr. Rice said. “It’s becoming a very big product with its own risks, and the question is does an element of it belong in multiple different policies or should it just be in a cyber policy?”

In particular, which policies should respond to business interruption claims following a cyber event has yet to be determined, experts say.

“The market doesn’t seem to have settled on where that belongs,” said Joe Peiser, New York-based executive vice president and head of broking, North America, for Willis Towers Watson PLC.

Zurich just launched a new cyber form that replaced Zurich’s security and privacy policy and brings together coverages previously available only through endorsements.

“We think the best way to protect against cyber is to have a dedicated cyber policy with dedicated limits and language tied to the coverage so there’s real clarity of intent,” Mr. Horgan said. “We really are pushing the brokerage community to rally around that, because we’ve found when people try to put the coverages as an addendum on existing policies, there tends to be as many disputes on the coverage as there has been providing the service to our customers. We’re really becoming more and more convinced that a dedicated policy with dedicated limits and very clear language is the right way to make sure the coverage is provided to the customer, allows for quick response on the claim and minimizes any disputes.”

On the property side, insurers and brokers are reporting some rate increases, particularly in areas with vulnerability or losses related to wind and flood. But predictions of a widespread increase in property rates following last year’s natural catastrophes have not materialized, in large part due to an abundance of capacity in the marketplace, and the devastation wreaked by Hurricane Florence has not changed that.

“I think the markets proved they can handle any one large loss like that,” Mr. Rice said. “There’s still a lot of capital in the marketplace.”

Aon’s portfolio data shows that property rates overall are up about 7.5% in the last quarter, but “that mass generalization doesn’t really tell you anything,” Mr. Fitzgerald said. “Those accounts that actually have losses emanating from 2017 and a loss ratio in excess of 100% are seeing closer to a 30% rate increase. It’s important to understand that there is some rate in the property market, but it’s pretty isolated to those that have taken dollars out of the insurer community. There’s no such thing as a hard market today. There’s microsegments of the market that are more difficult.”

Property has seen some rate increases, but Zurich expects that will likely dampen depending on how the season progresses, Mr. Horgan said.

“Auto has had multiple quarters of double-digit rate,” he said. “The rate has not caught up with the existing loss patterns. I know it’s disappointing for our customers, but we expect the rate to continue to challenge the auto market. I think the sleeper that’s out there right now, where there’s a lot of pent-up challenge, is going to be in liability. People aren’t talking a lot about liability rate, and it may not happen in the short term, but if we look over the horizon, there is tremendous pressure being built up in that line.”