OVERVIEW:
The public D&O Market is no different from any other aspect of our economic system. It is driven by basic principles of supply and demand. In 2021 and the first half of 2022, there was a high demand and limited supply for D&O liability coverage, which drove up costs and retentions. As a result, several new carriers entered the market looking to add capacity, thus adding supply. Correspondingly, public listings started drying up in the second half of 2022, lessening demand.
The following statistics reflect the above dynamics:
- SPAC IPOs:
- First half of 2022: 70
- Second half of 2022: 16
- First half of 2023: 17
- 2022 BRP/NASDAQ D&O Benchmarking report reflected an average of 25% overall increase in D&O premiums
- 2023 BRP/NASDAQ D&O Benchmarking report reflected an average of 20% decrease in primary D&O and a 35% decrease in entire programs.
MARKETPLACE TRENDS:
Pricing: After several years of hard market conditions, the shifting trend that began in the second half of 2022 has continued into the first half of 2023, providing more favorable public company D&O liability terms for most insureds. Significant rate reductions (typically in the 20% -30% range) have been widely prevalent across both new and existing public company businesses compared to the first half of 2022. D&O rates on Excess layers have experienced significant marketplace pressures, leading to sizable reductions, especially for those that had not experienced the benefit of the shifting marketplace within their 2022 programs.
Capacity: Capacity remains quite abundant, with slower capital markets activity limiting the flow of new public company business for insurers. The addition of several new entrants into the D&O marketplace has provided a significant influx of additional capacity. This new capacity, combined with a significant reduction in overall deal activity, has created an accelerated pricing deterioration as markets are now aggressively vying to compete on more renewal business (instead of relying on new listings). This has resulted in more favorable conditions for insureds versus the first half of 2022.
Terms & Conditions: Insurance carriers are increasingly becoming more flexible on terms/conditions and expanding their risk appetite. Carriers are showing a willingness to reduce higher securities claims retentions that were required over the past few years. Additionally, carriers are seeking to expand their limits on existing renewals more frequently. Insureds should partner with a strong brokerage team to secure the broadest coverage available in the marketplace.
CLAIMS TRENDS:
Over the past ten years, the frequency of securities class actions has formed a bell curve. With numbers peaking in 2019 at about 290 filings, they have continued to fall. 2023 seems to be on track to see a slight increase, with 101 cases filed by the end of June, but the year should wrap up with numbers seen in 2021 with 198 being filed that year.
Two reasons for this bell curve are:
- The progressive increase, then the corresponding drop in the number of state suits filed challenging mergers & acquisitions, peaked in 2019 as those actions fell out of favor with plaintiff firms.
- The drop-off in IPOs, which can attract the attention of plaintiff firms who hope to make a case for any slips in stock prices.
At present, the slight increase seen from last year has been attributed to the fallout from a regulatory focus on the crypto market.
ITEMS ON THE HORIZON:
- Financing and access to capital remain critical for insurers. As we continue in a prolonged rising interest rate environment, companies need to identify their sources of capital/plan for securing additional funds to maintain operations over the next year and address upcoming debt obligations.
- Marketplace impact of New Nevada law AB398 going into effect on October 1, 2023 (prohibits defense expenses/legal costs to erode the limits of a new/renewal liability policy).
- Supreme Court decision on affirmative action may have an impact on companies’ ESG Initiatives. Pushback in this area has already happened, and the court’s ruling could potentially amplify this resistance.
- As we enter the second half of 2023, D&O pricing is anticipated to begin to level off with a flat to 10% savings range for companies that experienced significant program savings last year.
- The Bank D&O marketplace is still determining the potential ramifications of the recent bank failures.
