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Excess D&O rates fall as competition heats up

Posted On: Jul. 12, 2022 6:57 AM CST


Policyholders saw rate decreases of up to 35% in the July renewals for directors and officers liability risks, fueled by significant capacity in excess layers and increased competition, experts say.

Companies that had experienced the biggest increases over the past four years are getting the largest decreases, with limits that were cut during the hard market being restored and retentions lowered.

The softening market trend will continue at least through this year and into 2023, experts say.

Certain lines, however, remain problematic, including cyber; environmental, social and governance risks; and cryptocurrency-related lines, they say.

Public company D&O decreases have been anywhere from 10% to 35%, with insurers “chasing the rates down,” said Corey Turner, Atlanta-based vice president, professional lines group, for Amwins Group Inc.

“D&O renewals are buyer-friendly for the most part,” with good competition and in many instances rates flat at worst, said Andrew Doherty, New York-based national executive and professional risk solutions practice leader for USI Insurance Services LLC. “I see it as continuing to show decreases, at least for the foreseeable future,” he said.

Mr. Turner said the market is being driven by significant capacity, while the new business pipeline for public D&O coverage has been shut off by a lack of initial public offerings and special purpose acquisition company-related transactions.

Matthew McLellan, Washington-based managing director and D&O product leader for Marsh LLC, said that where previously new entrants had been leading the charge on competition, “we’re now seeing legacy insurers catch up, so that there is a lot more competition on each account.”

Observers say companies that earlier faced the largest increases are seeing the biggest decreases in their D&O rates as the market recalibrates. 

Also seeing more relief are companies that went public at the IPO market’s height, said Teresa Milano, Boston-based vice president, management liability, with Woodruff Sawyer & Co. Reports say IPOs peaked last year.

Competition is more intense in excess layers, which is a reversal from 2020 and the first part of 2021, when average rate increases were higher in the excess layers, Mr. McLellan said.

Experts note that new market entrants traditionally start in excess layers, before venturing into primary business.

There are “not a lot of takers for a brand-new market on the primary level. Most insureds still have some interest in more long-term capital in their first layers and more experienced claims people,” said Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC, who estimated there have been about 30 new entrants into the market, all of which are writing excess coverage.

Tim Fletcher, Los Angeles-based CEO of Aon PLC’s financial services group in the United States, said, however, that “there’s a lot of risk still in the system,” including supply chain issues, disruptions because of the war in Ukraine, and recession fears.

Despite the softening market, insurers are hesitant to write new cryptocurrency business, which has been a challenging sector because of the heavy losses in value reported over the past few months, Mr. McLellan said.

There is also uncertainty around de-SPAC transactions, with several hundred blank check companies looking for merger partners, he said. There is concern the investors behind the companies might engage in transactions they might not have done otherwise “because they are up against the clock to get completed,” Mr. McLellan said. SPACs usually have two years to make an acquisition after their IPO.

Meanwhile, the U.S. Securities and Exchange Commission is beginning to look at companies’ statements about ESG risks, and shareholder derivative claims are beginning to be filed, Mr. McLellan said.

Insurers “are starting to ask more questions that are expressly focused on the ESG issue, but there’s not a complete consensus on what the scope of ESG is,” Mr. Fine said.  “My general sense is that insurers mostly want to be reassured that companies are aware of the importance” of the issue and are taking it seriously.

D&O rates will continue to soften, said Abby Bellgrau, Chicago-based executive underwriter, management liability, at AmTrust Exec, a unit of AmTrust Financial Services. But macro-economic issues such as inflation, labor shortages, supply chain constraints, the Russia-Ukraine war and COVID-19 fallout may help stabilize them, she said.  

A possible recession’s effect “is a bit of an unknown,” said Mr. Doherty of USI.

“I don’t think it will have a dramatic kind of turning, firming impact unless it’s sustained, and companies begin to have real financial issues. But that could take awhile to show itself,” he said.