Previously, the private and nonprofit D&O marketplace had been described as fragmented, where most (69%) insureds experienced flat renewals in 2018 with rate changes from -9% to +9%. Now, looking at 2019, most (37%) insureds still experienced flat renewals, but that number is almost half the number as the prior year and a similar number experienced increases of 1% to 9% as evidenced in figure 1.
For 2020, some insurers are signaling their intent to seek up to 20% rate increases and looking to increase retentions as well. Meanwhile, other insurers suggest that small increases are predicted. Many risk characteristics influence these results, such as significant changes in ratable exposure, any type of liquidity or significant debt issues, presence in California and other higher-risk areas, claims history, nature of operations, and size. As a result, many accounts will range between remaining flat or receiving increases of up to 10% by nature of their having underwriter-favored risk characteristics, while others will likely experience bigger increases. Fierce competition still exists for most accounts (again, those with underwriter-favored risk characteristics), which will help to abate increases.
There is a longer tail on D&O claims, with insurance companies still paying out losses from claims that occurred during the financial crisis. Given the broad entity coverage provided under private and nonprofit policy forms, insurers often find themselves paying increasingly expensive claims, leading them to be especially concerned with the long tail associated with these claims, but claim frequency has slowly been decreasing in recent years, as shown in figure 2.
Markets have released or are going to release new policy forms that appear to have broader coverage in the base form, but there continues to be fewer markets that can compete in the smaller private and nonprofit risks. Underwriting appetite has changed as well, either because of turnover that is evidenced by many of the leading markets as well as the payouts of longer-tailed claims. This is clearly a challenge when placing a riskier account, since it is unclear if they will remain on the risk at renewal. Even though we see fewer clients who are financially distressed compared with years past, underwriters are still gun-shy about those who are, so they require higher scrutiny when reviewing those risks. Thus, many underwriters look to cut limits and add bankruptcy exclusions at first glance of the deteriorating financial condition of insureds. That is why it is imperative that a complete submission, including the full audited financial statements in their entirety, be sent to us so we can start the discussions and negotiations as soon as possible.
More discussions are also being held with clients regarding the implications of security and privacy liability on D&O as the frequency of cyber liability claims has increased. A cyber claim can cross over into D&O when there are allegations that the directors and officers did not put the proper safeguards or coverage into place. In addition, there are more first-time buyers of D&O due to the heightened awareness of this coverage and the fact that smaller organizations are more able to afford it. Carriers have begun to add a cyber module to their management liability package to address these concerns about D&O and cyber crossover claims.
We have also seen more markets add exclusions for false advertising claims since there is a higher frequency of those claims. Markets are also more apt to add exclusions for crossover claims such as cyber, as was previously mentioned, and professional liability in particular.
The uptick in merger and acquisition activity continues to increase. As a result, there are more questions asked about change in control and protection from the insureds during the transaction. Thus, we are discussing the implications of the transactions with the markets and are placing more runoff policies. Additionally, more of our clients are forming employee stock ownership plans (ESOPs), which clearly have direct implications on fiduciary liability coverages. From a D&O perspective, many carriers are still also excluding any D&O claim that pertains to an ESOP. Lastly, there is also turnover and hiring of competitors, so there is greater concern of litigation surrounding that in the D&O arena.
It appears that there have been fewer insurance company mergers and acquisitions in 2019. As mentioned last year, Hartford acquired Navigators in May 2019, but no other significant acquisitions that impact this market have been announced.
Thus, the trend of minimal rate increases and rate decreases seems to be nearing its end, but we still are seeing different perspectives of the market leaders and different claims experiences, so these numbers will probably vary in 2020. We will most likely see rate changes range between remaining flat and increasing 10%, and no changes to the risk of insureds who do not have increased or riskier exposure.
For additional information, please contact Heidi at heidi_roberts@ajg.com or visit www.ajg.com/mlp.
The information contained herein is offered as insurance industry guidance and provided as an overview of current market risks and available coverages and is intended for discussion purposes only. This publication is not intended to offer legal advice or clientspecific risk management advice. Any description of insurance coverages is not meant to interpret specific coverages that your company may already have in place or that may be generally available. General insurance descriptions contained herein do not include complete insurance policy definitions, terms, and/or conditions, and should not be relied on for coverage interpretation. Actual insurance policies must always be consulted for full coverage details and analysis.
Insurance brokerage and related services to be provided by Arthur J. Gallagher Risk Management Services, Inc. (License No. 0D69293) and/or its affiliate Arthur J. Gallagher & Co. Insurance Brokers of California, Inc. (License No. 0726293).
