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The management liability marketplace faces numerous challenges, including an increase in fiduciary liability lawsuits, as it braces for expected SPAC-related losses.
These were among the themes during this year’s Professional Liability Underwriting Society’s annual directors and officers symposium, which was held remotely April 28 and 29.
Even before the pandemic, the industry faced several challenges, including anticipated hikes in premiums and retentions, as well as more class action derivative lawsuits, said Christine Williams, New York-based CEO, financial services group, at Aon PLC.
“We’re continuing to see portfolio adjustments overall out of the gate,” and rates continue to experience upward pressure, she said.
However, there have been about a dozen new entrants into the management liability market in the United States and London, Ms. Williams said. “It’s early days, but I think they will be able to provide some ample capacity,” she said.
Chris Warrior, London-based head of commercial management liability U.K. for Berkshire Hathaway Specialty Insurance Co., said the market is at a crossroads, with London insurers stepping up with an appetite to provide new capacity.
The reasons why so many of the new entrants are in London or Bermuda rather than the United States was also discussed.
In the U.K., entities have the ability to get up to speed fast, and freedom of rate and form, while in the U.S., new markets are forced to go through individual states, “and there is a lot of work that has to be done to get the entity’s paper ready to go,” said Jack Kuhn, CEO, insurance, at Vantage Risk Ltd. in Berkeley Heights, New Jersey, whose parent company is Bermuda-based.
Meanwhile, although the explosive growth in special purpose acquisition companies, or SPACs, presents opportunities for the D&O liability insurance market, insurers are approaching the issue cautiously, speakers said.
SPACs, also called “blank check companies,” are shell companies formed for the purpose of raising capital to acquire existing businesses and usually have two years to make an acquisition after their initial public offering.
The structures allow the privately held businesses acquired to become listed without going through a traditional initial public offering.
SPACs unfold in stages, including the pre-announcement stage before it has made an acquisition; the point where it merges with the selected private company; and the post-merger or “de-spac” stage, when there is a combined company. Companies may seek D&O coverage at all of these stages.
“There are a lot of SPACs out there looking for merger partners right now, with a lot of money and lots of IPOs in the pipeline,” said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.
SPACs are an opportunity, but “at the same time you know that you’re going to see losses just because of the sheer volume of activity,” said Allison H. Barrett, New York-based head of North America financial lines for American International Group Inc.
“There’s some risk inherent in these transactions,” she said. Clearly, the SEC is “looking to slow down the process but not stop it,” she said.
There are questions as to what happens when SPACs de-spac. “That’s candidly where we see a lot of risk,” including merger objection claims, Ms. Barrett said. “There’s a lot there and we’re just kind of waiting and watching.”
Stephen Sills, CEO of New York-based Bowhead Specialty Underwriters, said the accelerated process in which companies go public under SPACs “creates a lot of problems.”
Typically, bringing a company public involves “a long baptism under fire and a lot of training,” Mr. Sills said. Now, “you just add water and instantaneously become a public company,” he said, adding that he is not sure all of the CEOs and managers of these companies are used to the constraints they must work under in that particular environment.
There is also potentially a “huge aggregation problem here” from a D&O liability perspective, as SPACs go through their stages, he said.
Insurers are concerned about aggregation, with the possibility they can be hit by the same event multiple times, said Jaimie Hunter, Brooklyn-based senior vice president at Guy Carpenter & Co. LLC.
Change has already occurred in the once “sleepy” fiduciary liability market because of the growing number of excessive fee claims lawsuits being filed, executives said.
The fiduciary space recently has taken “an abrupt and sudden turn” because of these claims, which are class actions brought against defined contribution plans in connection with allegations that recordkeeping and other expenses that they charge are unnecessary or unreasonable, said Alison Martin, Pittsburgh-based fiduciary product manager and senior vice president at Chubb Ltd.
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