Research

Insurance Marketplace Realities: Directors and officers liability

2018 Spring Update on Commercial Insurance in North America

April 12, 2018

Price prediction

  Trend Range
Overall: No change or slightly up/down –5% to +5%
Public company, primary: No change or slightly up/down –5% to +7.5%
Public company, excess: No change or slightly up/down –10% to +5% (includes Side-A)
Private and NFP companies: No change or slightly up Flat to +10%
Financial institutions: No change or slightly down –5% to Flat

Key takeaway

Renewals in 2018 may challenge price-sensitive buyers in their support of incumbent insurers. For most, insurer quality (financial strength and coverage expertise) and long-term relationships will justify smaller discounts or, in more cases now, paying slightly more premium. Nevertheless, buyers who market their placements will find more opportunities to pay less.

Leading insurers are exhibiting market discipline. Rates will continue to firm — less soft, but not hard — except where still-ample competition sees this firming as an opportunity to displace a competitor.

While key insurers have demonstrated discipline, citing profitability concerns, competitive market pressures remain at work. Insurers may receive less premium in 2018 than they would like (or feel they need).

  • Public directors and officers (D&O): Average premiums were down overall in Q4 2017 (about 5%).
  • Primary public D&O: Firmer than expected. As many as 25% of all public primary placements could see significant increases in cost. Definitely a trend to watch.
  • Initial public offering (IPO): A limited number of primary insurers are showing competitive interest, making placements relatively more challenging.
  • Private companies: Financially distressed firms or companies in volatile or emerging industries are seeing premium increases and coverage restrictions outside the norm. Marketing these placements could result in better overall results, but may not influence incumbents to back off renewal terms.
  • Cyan: The recent U.S. Supreme Court decision will likely have D&O insurers, especially those that write IPO business, positioning and articulating the need for increased rates and higher retentions.
  • Excess: Low excess, public company layers (including IPOs) may experience more upward rate pressure than higher attachment point layers.
  • Side-A: Still seeing competitive pricing pressure. Some decreases, as a percentage of the premium, are still substantial. However, dollar savings will become less significant.
  • Coverage: New features are still negotiable, although the improvements may come at a price.

While insurers trumpet news supporting the increased frequency of claims, adverse loss trends and profitability challenges that are real for some segments, overall D&O loss trends are more balanced than some headline numbers suggest.

  • While 2017 saw near record securities class action filings (more than 400), roughly 50% of those were M&A merger-objection or proxy statement cases. Many of those filings are expected to have lower severity implications, with disclosure-related settlements or bump-ups generally not covered by D&O policies.
  • The average settlement in 2017 was $25 million, a drop from $44 million in 2016 and the lowest in eight years. Of the settlements in 2017, 60% were less than $10 million. The median level for settlements in 2017 was $6.5 million, below the ten-year average of $7.5 million.
  • Securities and Exchange Commission enforcement was down significantly in the second half of 2017. While that may not be predictive for 2018, it does mean insurers had fewer investigation-related losses last year.