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A roadmap to navigating the hardening D&O marketplace

Risk & Analytics|Financial, Executive and Professional Risks (FINEX)

September 25, 2019

For risk professionals not experienced in a hardening market, this primer helps make sense of conditions and gives guidance in mitigating impacts on their organizations.


Having crossed into the second half of 2019, and with the release of mid-year securities litigation reports behind us, a consistent theme permeates the directors & officers liability insurance marketplace: securities litigation filings have held steady at near record levels for more than two years, median and average settlements have increased, and D&O insurance premiums are on the rise. The last time we experienced similar market conditions was in the early 2000s, before many of today’s risk professionals were in positions to oversee organizational insurance programs.

Below is a primer, a roadmap, for risk professionals who have not experienced a hardening market. The purpose is to assist them in making sense of tightening conditions and to guide them in taking steps to mitigate against the market’s impact on their organizations.

What is a “hard” (or “hardening”) insurance market?

In general, a market can be characterized as “hard” when there is an increased demand for coverage, coupled with a reduced supply. Competition for business has diminished. Policy premiums are higher year-over-year, often significantly higher, for the same levels of (or often less) coverage, and even for those companies with little or no material change in risk profile.

In a hard market, insurers might not only increase premiums, they may also force policyholders to retain more risk in the form of higher self-insured retentions and deductibles. They will apply stricter underwriting standards, narrow existing coverages, and potentially walk away from new business and renewals if the insured is unwilling to agree to their terms. To be fair, in almost all instances, underwriters are adhering to their managements’ more aggressive premium and revenue mandates, as well as efforts to reduce claim exposures and losses. The impact to insureds is nevertheless the same: companies may be paying more and getting less.

To characterize a market as “hardening” (also “tightening” or “firming”) is to suggest that the market has begun to develop tightened conditions but is not yet in a truly “hard” state. This describes our current marketplace. Today, for instance, premiums and retentions have trended upwards, but some levels of insurer competition remain, thus staving off more severe increases. Also, we have not yet experienced a trend in insurers pulling back on terms and conditions, as some companies with favorable risk profiles continue to enjoy broad coverage and, in some cases, enhanced terms at renewal.

What is causing a hardening market?

The form of claim activity that most impacts public company D&O insurers is the securities class action (SCA) filed in federal court. Because of federal law requirements associated with public notices of class actions, it is relatively easy to track and study SCAs. Among other things, we know how many of them are filed and where they are filed. We know when and to what extent they are dismissed, and we know when and at what levels they are resolved.

Armed with these capabilities, we are aware that the average number of SCAs filed each year from 1996 to 2016 was 219.1 In 2017, the landscape changed. A staggering 412 SCAs were filed that year.2 In 2018, 402 were filed.3 In the first half of 2019, 198 were filed (prorated to a full year frequency of 396).4 Stunningly, more SCAs were filed in the first half of 2019 than in the full year of 11 of the previous 23 years!5

Why are more SCAs being filed? Consider the following (in no order of significance):

  • IPOs — More companies than in recent years are filing for initial public offerings (IPOs) and, in many of those instances, the quality of the offerings are questionable. For example, many IPO companies remain unprofitable.6 Also, smaller offerings permitted under federal law7 may allow for an expedited process with fewer disclosures and, thus, less transparency. This has the potential to make companies and their directors and officers more susceptible to allegations of fraud.
  • M&A Objection Litigation — Federal court SCAs arising from M&A activity, brought by shareholders alleging an unfair valuation of their shares in a transaction, began to increase in frequency in 2016, exploding in 2017 and 2018. The phenomenon began when the highly influential Delaware Chancery Court declined to approve what was a customary form of settlement in which certain proxy disclosures were tweaked, plaintiffs’ attorneys were compensated, but shareholders received little or no material benefit. With the court articulating it would reject similar settlements in the future, the proverbial spigot was turned off in state court, leading plaintiffs’ attorneys to seek a more hospitable environment in federal court. Arguably, the migration did not result in an increase of claims that insurers were handling; however, merger objection cases have since become costlier to litigate and resolve.8
  • Event-driven SCAs — Unlike traditional SCAs, in “event-driven” litigation, a company’s stock decline was not caused by corrective disclosures relating to financial matters, such as financial restatements. Rather, it was caused by an adverse event, such as a product recall, wildfire, accident, etc. For plaintiffs, tragedy begat opportunity. In particular, they allege that the event rendered previous, more assuring, public disclosures misleading, resulting in purported violations of the federal securities laws. As matters involving financial irregularities have diminished, the plaintiffs’ focus on events as a source of additional SCA activity has been a notable trend.9
  • Emerging plaintiffs’ firms — Historically, the number of law firms filing securities litigation was relatively small. In contrast, newer entrants in the plaintiffs’ bar are filing more cases. Commentators, including academics, have referred to the firms as “emerging” (as opposed to “established” firms) and have considered many of their pleadings to be of lesser quality.10 Regardless, the phenomenon has necessarily resulted in increased costs and expenses.

Other factors leading to the hardening marketplace include:

  • Cyan: Litigation in multiple venues — In March 2018, the United States Supreme Court issued a ruling in the case of Cyan, Inc. v. Beaver County Employees Retirement Fund.11 At its core, Cyan allows for litigation involving IPOs and secondary offerings to be asserted in federal court and simultaneously in state court. The court’s decision was based on a strict reading of governing law, something that, in a different political climate, might be relatively easy to address with corrective legislation. In the interim, however, litigation in multiple venues is resulting in increased costs and expenses, as well as the potential for more significant liability considering different state law standards and less sophisticated judiciaries.
  • Fewer public companies/smaller risk pool — Despite an increase in IPOs, there are fewer publicly traded companies now that in years past. At the end of 1996, there were 8,090 public companies in the U.S. At the end of 2018, there were 4,397 — a decrease of 46%.12 As a result, insurers are underwriting fewer public companies, yet they are having to address a greater number of SCAs. Stated differently, insurers are less able to spread the litigation risk across a broader risk pool.
  • Average settlement values have more than doubled — The average SCA settlement is on the rise. In 2018, it was $69 million, a 176% increase over 2017’s average of $25 million, and on par with the 2016 average of $73 million.13 These extreme differences can be explained, in large part, by a greater number of “mega” settlements in 2016 and 2018 (settlements in excess of $100 million), which have the effect of skewing averages.
  • Median settlement values have more than doubled — Even disregarding average settlement figures, the median SCA settlement also more than doubled in a one-year period, from $6 million in 2017 to $13 million in 2018.14

How can companies mitigate the impact of the hardening market?

With a hardening market settling in, below are measures that risk professionals and their organizations can implement to mitigate against oncoming adverse conditions.

  • Start early — Engage with your broker early in the renewal process. Develop renewal pricing expectations, but be prepared for those expectations to change. In this regard, an underwriter’s initial pricing estimates may become noticeably different during the renewal process. Broker communications on changing conditions are critical. Likewise, internal budgeting should be reevaluated and adjusted as warranted.
  • Stand out among peers — In renewal discussions with underwriters, your broker should highlight factors about your risk profile that differentiate you in this challenging market. For example:
    • Where applicable, you may not be the kind of acquisitive company that most exposes you to merger objection SCAs.
    • Where applicable, you may have no intention of filing for an IPO or secondary offering that exposes you to Cyan risks. Even if you are preparing for an IPO, you may not fit the profile of the riskier types of companies engaging in the process.
    • Where applicable, you may not be in an industry that is most impacted by securities litigation risk. The three most frequently sued industries in 2018 were (1) health technology and services, (2) electronic technology and technology services and (3) finance.
  • Model your risk — Whether or not your risk is increased for one reason or another, be sure that your broker is employing data to mitigate market impact. Is your broker modeling your organization’s risk to highlight financial metrics and other factors that serve to emphasize a diminished susceptibility to risk and potential loss severity?
  • Beef up coverage breadth — Seek coverage/policy wording improvements to lessen the risk of unnecessary coverage limitations in the event you are the subject of a claim. Your broker should be staffed with seasoned coverage and claims professionals who audit policies and negotiate best-in-class language for you. Remember that, although the market is hardening, we are not yet experiencing a constriction in coverage breadth.
  • Evaluate corporate governance and cybersecurity practices — Periodically engage providers to take a fresh look at your organization’s corporate governance practices, in addition to its cybersecurity infrastructure. There is no shortage of authority linking cybersecurity to D&O risk.15
  • Consider alternative program structures — Evaluate different program structures, such as lowered limits, increased retentions, reduced ABC coverage in favor of greater Side A DIC coverage, and other structural options that can have the effect of reducing premium. In doing so, however, exercise significant caution! It is likely you played an important role in designing your company’s current program based on sound analysis and broker guidance. Especially in today’s marketplace, increasing your organization’s risk may be penny wise and pound foolish.


For many of today’s organizational risk professionals, a hardening D&O marketplace is uncharted territory. Take time to educate yourself and consider what a firming market means for your organization. Above all, work closely with your broker and other professionals to address and offset anticipated issues/concerns and to set yourself up for a successful renewal.

1 Stanford Law School, Cornerstone Research, Securities Class Action Clearinghouse,, accessed August 16, 2019.
2 Id.
3 Id., see also Cornerstone Research, “Securities Class Action Filings: 2018 Year in Review.”
4 Cornerstone Research, “Securities Class Action Filings: 2019 Midyear Assessment,” p. 1.
5 Id., see also, Stanford Law School, Cornerstone Research, Securities Class Action Clearinghouse,, accessed August 16, 2019.
6 See, e.g., Wilhelm, Alex, “Unprofitable IPOs Are Getting Bigger,” Crunchbase News,, June 5, 2019.
7 Jumpstart Our Business Startups Act, or “JOBS Act,” Pub.L. 112–106.
8 See, e.g., LaCroix, Kevin, “The Growing Costs of Merger Objection Litigation,” The D&O Diary,, July 11, 2018.
9 See, LaCroix, Kevin, “Scrutinizing Event-Driven Securities Litigation,” The D&O Diary,, March 27, 2018, discussing Coffee, Jr., John C., “Securities Litigation in 2017: ‘It Was the Best of Times, It Was the Worst of Times’,” The CLS Blue Sky Blog: Columbia Law School’s Blog on Corporations and the Capital Markets,, March 19, 2019.
10 For a discussion of “emerging” firms, see Klausner, Michael and Hegland, Jason, “Guest Post: Deeper Trends in Securities Class Actions 2006-2015,” The D&O Diary,, June 23, 2016, and cited by LaCroix as a factor in increased 2017 and 2018 SCA filings. See, LaCroix, Kevin, “The Top Ten D&O Stories of 2018,” The D&O Diary,, January 7, 2019.
11 583 U.S. ___, 138 S. Ct. 1061; 200 L. Ed. 2d 332 (2018).
12 The World Bank,, accessed August 16, 2019.
13 NERA, “Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review,”, p. 28.
14 NERA, “Recent Trends in Securities Class Action Litigation: 2018 Full-Year Review,”, p. 30.
15 See, e.g., Meer, Jonathan E., “Directors and Officers: Be Wary of Growing Cyber Responsibilities,” Wilson Elser Moskowitz Edelman & Dicker LLP,, December 2018.

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc. such as Willis Towers Watson Northeast, Inc. and Willis of Canada, Inc.

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FINEX D&O Observer Fall 2019 PDF 6.5 MB

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