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Risk managers at publicly held companies are facing double-digit rate hikes on their directors and officers liability insurance program renewals, a trend that is expected to continue at least through this year.
Insurers are cutting back limits, tightening coverage terms and conditions and self-insured retentions are increasing, observers say.
This hardening is having a particularly significant impact on certain market segments, such as biotech companies and firms with initial public offerings, say experts, who point to increased securities class actions and higher settlements in derivative suits among factors driving the increases.
But long-term policyholders are not necessarily seeing such severe increases, they say.
Meanwhile, in a reversal of the past renewals, in some cases excess insurers are charging higher rates than primary insurers, say experts.
“Renewals are difficult,” said Scott Meyer, New York-based division president, financial lines, for Chubb Ltd. “Brokers and clients are trying to get out ahead of the game because they are expecting increases,” and seeking one-on-one meetings with insurers “so they can put their best foot forward and address any issues.”
“All public company policyholders and many private company policyholders are seeing some degree of increase,” depending on their size, history, previous claims, and financial history, with health care, life sciences, financial services, high tech and, to a lesser extent, telecommunications firms particularly impacted by higher rates, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty LLC, in Beachwood, Ohio.
“January renewals are challenging,” said Sarah Downey, New York-based FINPRO and D&O product leader for Marsh USA Inc. “It takes a little bit longer to get the deals done than it used to.”
“We continue to see primary carriers looking for substantial increases, certainly double-digit, and as high as 50% or more in some cases,” said Rob Yellen, New York-based executive vice president of Willis Towers Watson PLC’s FINEX North America practice.
While rates for companies with IPOs have been higher than many other accounts, now their D&O insurance costs have “gone to extreme levels, to where you’re seeing rates sometimes three times or more above the rates of similarly-sized public companies” that have been public for a number of years, said Andrew Doherty, Valhalla, New York-based national D&O practice leader at USI Insurance Services LLC.
Peter Taffae, a directors and officers liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc., said companies with large towers are more frequently finding them “inverted,” with excess layers charging higher rates than primary insurers.
Priya Cherian Huskins, San Francisco-based senior vice president, D&O, for Woodruff Sawyer & Co., said, “I saw it more often in 2019 than I’ve seen it in the past, but I don’t expect to see it very much in 2020 because an inverted layer, in some sense, represents a mispricing by somebody in the D&O insurance tower” and “the market seems to be coming to a more clear consensus now where things will be priced.”
Mr. Yellen said in some cases policyholders need more insurers to fill out their programs, “particularly for larger towers and even more so for those segments that are being perceived as a higher risk class.”
“Limits are still available in the marketplace, but sometimes for a price that’s significantly higher than buyers have historically seen,” said Mr. Doherty. “We’ve seen some buyers consciously buy or convert Side ABC coverage to Side A only coverage in order to get some pricing relief,” he said.
Self-insured retentions are also increasing, although increases are “very risk specific,” said Ms. Huskins. Higher retentions could lead policyholders to reduce their overall limit purchase, she said.
Meanwhile, loyalty is paying off, say experts. “In a hard market, we can most clearly see the benefit of staying with a carrier over a long period of time,” Ms. Huskins said.
Rate hikes will continue at least for now, say experts. “I don’t see the insurers catching up on rate increases for at least a few to several quarters out,” said Devin Beresheim, New York-based executive vice president for Lockton Specialty Practices, a unit of Lockton Cos. LLC.
However, rates will start to increase on a “case by case, carrier by carrier” basis whereas in 2019 “it was more of market segment by market segment” basis “and in certain commercial segments it didn’t matter how good you were,” or your claims record, said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.’s professional liability division.
One issue that could affect D&O rates would be a drop in stock market pricing, which could lead to more D&O claims, said Mr. Meyer. “That’s something we’re aware of and thinking about,” he said.