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Banking crisis puts focus on D&O underwriting

Silicon Valley Bank

The high-profile federal bank takeovers last month will create a ripple effect that could affect the cost and availability of directors and officers liability insurance in the financial sector, but how things will ultimately settle is unclear, experts say.

While D&O rates have softened over the past several months, the Federal Deposit Insurance Corp.’s takeover of Silicon Valley Bank in Santa Clara, California, and Signature Bank in New York in March and concerns over other banks may lead to higher rates and reduced capacity, they say.

In light of the crisis, established D&O insurers may leave the banking sector, although they may be replaced by new capacity that has entered the market in recent months.

Banks should also expect close questioning by their D&O insurers during their next renewals (see related story, below).

Putative class-action lawsuits were filed soon after the banks revealed their problems last month. 

Other banks, Silicon Valley venture capital firms, cryptocurrency entities and associated parties, such as attorneys and other professional advisers, may also become defendants in D&O-related litigation, experts say.

Litigation will likely also include derivative lawsuits that charge directors with breaching their fiduciary duties, and federal regulators may also file lawsuits, they say.

The timing of the banking crisis has limited its effect on the D&O market, observers say.

If it had happened 18 months ago, when capacity was more constrained, it would have posed more of a problem, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC.

Now, however, even if current insurers leave the market, new markets may be willing to step in, he said. 

“There are a lot of dynamics in play,” and it is too early to determine how the situation will develop, Mr. LaCroix said.

Despite the high-profile nature of the takeovers, they may not lead to a dramatic pricing change in the overall, softening D&O market.

“Sitting here today, this is an event that doesn’t seem severe enough” to have a significant effect on premiums, said William G. Passannante, a shareholder with Anderson Kill PC in New York.

“The feedback we’re getting from the market is damage control,” said Joe Catalano, Chicago-based executive vice president, professional lines, at Amwins Group Inc.

At least one large insurer said it is nonrenewing and exiting the space, and others are seeking to determine whether other banks have similar risk characteristics, he said.

“There will definitely be some contraction in capacity” in upcoming weeks, Mr. Catalano said. “I do expect rates to flatten out or maybe increase.”

D&O insurers are assessing other banks that may be on their watch lists as well as related issues, including the role social media has played in the crisis, said Jenny Fraser, a Chicago-based Amwins vice president, referring to reports that social media calls warning depositors to withdraw their funds from Signature created a panic that led to its takeover.

There will be more stringent underwriting “that may spill over into underwriting in general,” with insurers looking more closely at deposits, investments and choice of lending institutions, said Sherilyn Pastor, a partner with McCarter & English LLP in Newark, New Jersey.

For nonbank financial institutions, “there’ll be questions about the tentacles that might spread to them” and the exposure they might have to the banks that are in trouble or those that will be, said Andrew Doherty, New York-based national executive and professional risk solutions practice leader at USI Insurance Services LLC.

There is also a more general concern about the implications of the rising interest rate environment.

“We have noticed an increased hesitancy by insurers just because of the adverse impact of the economy” that may emerge from these events, said Tom Orrico, New York-based managing director, financial institutions, at Lockton Cos. LLC.

Renewals will be far more challenging, observers say.

“This means taking a deeper dive,” not only into performance but the portfolio, how the management team is structured, executives’ backgrounds and the institution’s regulator relationships, said Eileen Yuen, Whippany, New Jersey-based managing director of Arthur J. Gallagher & Co.’s financial institution practices.

Banks reexamine risk controls 

Policyholders in the banking industry and companies that work closely with banks can expect to be closely questioned by their directors and officers liability insurers during renewals and should be sure to have their risk management programs in order, experts say. 

Underwriters will ask many more questions, and companies must be prepared to provide much more detail about their potential exposures than they have in the past, said Kevin LaCroix, executive vice president in Beachwood, Ohio, for RT ProExec, a division of R-T Specialty LLC. 

“Right now, there’s no doubt in my mind that all bank boards and bank risk committees are reviewing the choices they’ve made,” said Priya Cherian Huskins, San Francisco-based partner and senior vice president at broker Woodruff Sawyer & Co. 

“They want to make sure they have a clear record of (overseeing) their responsibilities, in case the worst happens, and they have to defend their record,” she said. 

Policyholders should review their policies and make sure there are no “hidden traps,” said Larry Fine, New York-based management liability coverage leader for Willis Towers Watson PLC. Companies should make sure they do not have regulatory or bankruptcy exclusions, although the latter are rare in the United States, he said. 

“Conduct a thorough review of recent events that took down other institutions,” and “refine your own company’s control and procedures to best manage that risk,” said Tom Orrico, New York-based managing director, financial institutions, at Lockton Cos. LLC. 

“Investigate any new capacity in the marketplace” and “meet with as many insurers as possible to tell your story,” he said. 

But the heightened risks are not just for banks.

Joe Catalano, Chicago-based executive vice president, professional lines, at Amwins Group Inc., said corporate bank customers should examine their banking relationships to see if they can diversify them to spread out their deposit risks and perhaps hedge against interest rate fluctuations.