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D&O market hardens even more amid pandemic

Posted On: Jul. 7, 2020 7:00 AM CST

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An already hardening directors and officers liability insurance market is becoming even tougher for buyers during the COVID-19 pandemic, with rates increasing further, available limits contracting, retentions rising and in some cases insolvency exclusions being inserted.

Most observers say the market will remain hard at least through next year, although much depends on the pandemic’s progress and its economic impact.

In response, risk managers are changing the structure of D&O programs, including, in some cases, considering putting their D&O risks into captives.

Meanwhile, many experts expect that rising rates will attract new capital into the market, particularly from private equity firms.

Experts say the D&O market began turning in late 2018, and the trend has accelerated because of several interrelated factors, including event-driven litigation, merger objection lawsuits, a rise in securities class-action suits, increased claims frequency, higher defense costs, #MeToo-related risks and, most recently, COVID-19.

Close to 20 D&O-related COVID claims have been filed since March, and the fact that insurers are facing other types of COVID-related losses in their other coverages is driving some of the hardening, said Sarah Downey, New York-based FINPRO and D&O product leader for Marsh USA Inc.

Rates are doubling in some cases, experts say.

Insurers are “definitely being more selective in deploying their capacity, and the rates they want for that capacity are increasing across all industries, with specific industries being subject to even harsher terms and conditions,” said Roxsann Wilson, vice president, risk management, for Dublin, Ohio-based Cardinal Health Inc., who is the New York-based Risk & Insurance Management Society Inc.’s 2020 Risk Manager of the Year.

“Rates are moving up to where they should be, although we have years to get back to where we have to be,” said Scott Meyer, New York-based division president, financial lines, for Chubb Ltd.

This is the hardest market since 1985, with sectors experiencing the most stress including hospitality, retail mall owners, energy, automotive, entertainment and airlines, said Phil Norton, Chicago-based president of Arthur J. Gallagher & Co.’s professional liability division.

Excess rates are continuing to move higher faster than primary rates, experts say.

Limits are also being cut, with insurers that previously offered $20 million in capacity reducing the amount offered to $10 million and cutting $10 million limits to $5 million, experts say. “It’s absolutely crazy,” said Peter Taffae, a D&O liability insurance expert at Los Angeles-based wholesale brokerage Executive Perils Inc. 

“With both primary and excess reducing limits, you have to insert more layers, which adds a lot of process, takes more time, a lot more labor, and introduces an element of uncertainty, and it means things are going right down to the wire,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.  “Clients want predictability, certainly, and the current environment, I think, doesn’t lend itself to predictability.”

Private companies are not seeing rates increase so quickly as publicly listed companies, but they are more likely to see insurers insert insolvency exclusions in their D&O policies, experts say.

Insurers are introducing insolvency exclusions, typically, for potentially troubled companies, said Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co.

“This is obviously a terrible situation since one of the main functions of a D&O policy is to respond to situations of insolvency,” she said.

The exclusions are industry specific, said Brian Dunphy, senior vice president and managing director at Alliant Insurance Services Inc. in New York.

Insurers are “really honing in on the industries that are most impacted by the pandemic, including those that are foundationally based on foot traffic,” such as retailers, he said.

Some insurers are also introducing COVID-19 exclusions into their coverage.

“We have seen limited COVID exclusions,” which have primarily been inserted by London market insurers, said Andrew Doherty, Valhalla, New York-based national D&O practice leader at USI Insurance Services LLC.

“Our approach has been to address” unknowns related to COVID-19 through underwriting inquiries and analysis, said Joe Caruso, Allianz AG’s New York-based regional head of financial institutions for North America.

More policyholders are exploring captives as well as trusts, fronting solutions and integrated risk programs, said Laura Coppola, New York-based head of casualty and financial and professional liability North America, for Swiss Re Corporate Solutions.

Many point to Tesla Inc. CEO Elon Musk’s announcement that the company would not renew its D&O coverage but that he would personally indemnify Tesla instead.

“There are many more conversations around (captives) than we’re used to having,” Ms. Downey of Marsh said. “We have a few clients who are pretty far along in the process of deciding whether or not” to put D&O risks into an existing captive or forming a new one.

However, “it’s probably impractical for the vast majority of people we’re talking to” because companies are still able to get coverage, even though it might be expensive and they are buying less of it, said Devin Beresheim, New York-based executive vice president of Lockton Specialty Practices, a unit of Lockton Cos. LLC.

More broadly, risk managers are beginning to change the structure of their D&O programs in response to the hard market. 

“There’s really not one size fits all,” said Jeremie Saada, New York-based head of U.S. executive risk for Beazley Group PLC.

“Some companies that were used to buying very large towers of insurance are now buying either less insurance” or shifting more of their programs to Side A, which is also increasing in price “but is relatively cheaper than” more comprehensive coverage. For the most part, “they are buying slightly less insurance than they were before,” he said.

New capacity is expected to enter the D&O market, many observers say. “I’m surprised we haven’t seen it yet,’ Mr. Beresheim said. Some excess insurers have dropped down to primary “but very sporadically,” he said.

“There’s a good amount of capital out there that was waiting to get into the insurance market, and I think this hardening is definitely encouraging them to do that,” said Thomas F. Leahy Jr., president of IronPro, Ironshore’s professional and management liability division, which is a division of Liberty Mutual Insurance Co. “I think there will be some new entrants, probably by the end of the year.”

“We know there are some private equity folks exploring it,” as well as some insurers that have not historically been in the D&O market, said Christine Williams, New York-based CEO of Aon PLC’s financial services group.

The entry process, though, can take up to a year, she said.  “I don’t see anyone coming in the short term, unfortunately, in the next few months.”

The hard market will last at least through the end of next year, most observers say, but how long it lasts depends on the pandemic.

Mr. LaCroix said that if there is a prolonged economic downturn through the second half of the year “that could have a big impact, certainly on underwriting. It will mean that there will be bankruptcies,” which frequently result in D&O claims and contribute to loss costs, all while clients are also struggling with their own businesses.