Author: Heidi Roberts
Although one can argue if the pandemic is truly over — or if it will ever be — we have experienced less volatility than we had in the past couple of years and are looking forward to this trend continuing in 2023.
What we saw in the 2022 Directors and Officers Insurance Market
Since the financial condition of the insureds heavily impacts Directors and Officers (D&O) underwriting when looking at our clients' financial conditions, there are three main situations in our economy:
- Those who operated at a loss, closed their doors or filed for bankruptcy
- Those who were fairly stable
- Those who flourished so much that they acquired other entities and went public
For the first and last categories, there are still far-reaching implications on D&O, since the directors and officers of these entities had major decisions to make, especially when impacted by staffing shortages and supply chain breakdowns.
We've also seen fewer mergers and acquisitions among our clients, with the exception of private equity and venture capital firms that purchased family-owned private companies not passed on to the younger generation.
Insurance market response and underwriting process implications
Although underwriting scrutiny is still high, it has lessened since this time last year. We've seen fewer corrective actions overall. There may have been additional questions or changes in limits and retentions, but that was usually due to the client's exposures and not carriers adjusting their portfolios overall. However, we've seen more markets add exclusions, such as security and privacy, antitrust, insolvency, and communicable diseases. Although these exclusions may be added to their entire book, some offered carve-backs for defense costs, for example.
We have also seen some new entrants who are writing D&O coverage for private and nonprofit accounts, which can definitely drive competition for our more established markets. Some clients wanted to either increase limits due to increased exposure or reduce limits to save premium due to their financial constraints.
Gallagher has continued to find creative ways to reduce premium and offer alternative options, because this coverage is more important than ever for protecting directors and officers. As always, you should connect with your broker and risk management team to understand the nuances of your business.
Current state of the D&O insurance market
In addition, we generally still saw rate increases, but they weren't as dramatic as what we saw in years past.
We also have launched Gallagher Drive® for our private D&O clients. Utilizing Gallagher Drive, our proprietary data and analytics platform, our brokerage team can provide specific rate guidance for your line of coverage, industry and geography. Combined with deep expertise in your particular industry and business, Gallagher can help you navigate today's highly nuanced market.
D&O liability claim trends
D&O liability insurance claims have a long tail, with insurance companies still paying losses from claims made during the previous financial downturn. Given the broad entity coverage provided under private and nonprofit policy forms, insurers often find themselves paying more claims and more expensive claims, leading them to be especially concerned with the long tail associated with these claims. We also know that more insolvencies and bankruptcies often result in more D&O claims.
This trend is also the case with mergers and acquisitions. So whether a client's business floundered or flourished, claims for these scenarios are more likely.
We've also seen our nonprofit clients — especially social services organizations — tasked with doing even more with even less. Given the legacy risk of alleged negligent oversight from older claims (latent nature of this exposure) and the value of time and resources to better understand this risk today, nonprofits working with youth and vulnerable populations are targets for further legacy liability, and today need to prioritize best-in-class risk management that ultimately has board oversight. So given the market conditions, it's essential for clients with claims to be prepared to let the underwriters know what they've done to decrease their exposure.
Crossover claims are also more prevalent with D&O coverage. As mentioned earlier, many of the exclusions added are due to increased exposure. The false advertising D&O claims are still one of the most troubling to the markets and, although it may not be a standard D&O claim, depending on the allegation, the D&O policy is called to respond. We still see this trend with cyber and employment practices liability (EPL) in particular.
Key cyber considerations continue to include the following:
- More discussions are being held with clients regarding the implications of security and privacy liability on D&O, as the frequency of ransomware attacks and cyber liability claims has increased. We also see this trend heightened with more employees continuing to work remotely, even if part time.
- 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.
- There are more first-time buyers of D&O due to the heightened awareness of this coverage and the fact that smaller organizations can afford it.
Key EPL considerations include the following:
- Heightened awareness of social issues such as discrimination has increased the likelihood of EPL claims.
- Many companies are still adjusting to the workforce's demands for a hybrid workspace, but hybrid arrangements can get complicated and have implications regarding who is allowed to work where and what company culture is.
- EPL is a distinct and well-established coverage. We can see that decisions directors and officers make about their workforce may be called into question, and their reputation may be damaged because of it.
Looking ahead to the 2023 D&O insurance market
As we adjust to the perhaps post-pandemic era, most marketplace volatility has ended or waned. We project that, on average, there will be flat to 5.0% rate increases for clients with minimal changes to their risk profile.
Because of the highly nuanced nature of this market, it's imperative that you're working with an insurance broker that specializes in your particular industry or line of coverage. Gallagher has a vast network of specialists that understands your industry and business, along with the best solutions in the marketplace for your specific challenges.
Please note, a client's risk profile is the primary variable dictating renewal outcomes. Loss experience, industry, location and individual account nuances will also have a significant impact on these renewals. 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 where they can see increases over 50%. That's why it is even more important to have discussions ahead of time, so you can make an educated decision about this crucial coverage.