Bucking the trend, D&O insurance rates ease

Insurance rates for all types of policies continue to rise, but the steep upward premium trajectory for Directors & Officers (D&O) coverage is now starting to moderate.

A combination of new market entrants, a growing appetite for risk and a significant drop in the number of class-action lawsuits are leading to a deceleration in D&O prices following several years of sharp increases.

Significant Shift in the Litigation Landscape

The pressure on D&O rates is easing because of a variety of developments.

First, the number of securities class-action suits – a key driver of D&O price increases – fell 41% in the first half of 2021. This downward trend is a reversal from years of elevated litigation.

Second, Federal Forum Provisions in company bylaws, which are designed to avoid duplicative state court securities lawsuits for new issuers, are being affirmed. Case in point, no parallel state court cases were brought in California so far in 2021.

The evolving litigation landscape is a game-changer for first-time buyers of public D&O insurance. Over the past few years, underwriters raised D&O insurance prices following the U.S. Supreme Court’s Cyan decision in March 2018. That ruling resulted in a proliferation of class-action suits in state courts because it allowed states to retain concurrent jurisdiction with federal courts for liability actions under the Securities Act of 1933.

Time to Shop Coverage

Given the changing marketplace dynamics, now is a good time to review your D&O coverage and prepare for a renewal. In working with many management teams, Marsh McLennan Agency recommends the following best practices.

Start Early

• Meet with your broker a few months in advance of your D&O renewal to assess the options and develop a strategy to take advantage of current market pricing.
• Tell your broker about any changes that might impact the company’s risk profile: clinical data releases, product launches, regulatory filings, planned capital raises, new international locations. M&A activity needs to be reported throughout the year to ensure coverage is tailored appropriately.
• Align your timeline with board meetings and/or audit committee meetings. That’s especially important if any changes to your D&O policy and structure are being considered.

Differentiate Your Risk Profile

• Proactively address the concerns of underwriters. A pre-emptive approach will help in the renewal process. Your broker acts as your advocate by highlighting your positive underwriting attributes with the goal of differentiating your business.  Collaborate with your broker to determine the best way to message and position your business with underwriters. This is one of the many services MMA offers. 
• Meet with underwriters to provide a corporate update and answer questions. Educate underwriters about company-specific issues such as financials, debt, industry outlook, the competitive landscape, regulatory relationships, management’s experience, and the company’s overall track record. This information should be provided to both incumbent insurers and carriers who may compete for your business.
• Identify any new claims or notice of circumstances well in advance and partner with your claims advocates to manage the potential adverse risk factors. MMA has a robust claims team and coverage experts to engage and provide guidance regarding claims risks.  Especially in today’s marketplace, cyber risk – from data and privacy to resiliency plans – is now getting the attention of underwriters. It’s critical to proactively address these issues as part of the renewal process.

Evaluate alternative risk transfer solutions

• Consider higher self-insured retentions, co-insurance and more Side-A-Only limits (personal asset protection) as a percentage of an overall risk management program.
• Utilize Marsh’s proprietary analytics to determine limits and educate your board. These analytics tools can provide historical loss modeling and data analysis, as well as robust peer benchmarking data.

Select the right insurance partner

• Choose an insurer who understands your business and is committed to your long-term strategy. Successful D&O engagements happen when a company’s management team feels comfortable with an insurer’s underwriting experience, claims administration and financial strength/outlook.

Let Us Help You

Marsh McLennan Agency provides business insurance, employee health & benefits, retirement, and private client insurance solutions to organizations and individuals seeking limitless possibilities. For more information, contact our Executive Liability team.