SAN DIEGO – Directors and officers liability insurance rates may stabilize as the abundant capacity that has entered the market over the past three years counterbalances increased securities class-action filings and claims, experts say.
With many buyers seeing falling D&O premiums – after experiencing sharp increases between 2018 and 2022 – underwriters will seek to halt the slide in rates, they say. But it may take some time for the soft D&O market to change, they say.
After a record number of securities class-action lawsuits in 2019 and a steep decline in the following years, insurers saw an uptick in claims in the early months of this year, they said during interviews at Riskworld, the Risk & Insurance Management Society Inc.’s annual conference held earlier this month.
The number of securities class actions and settlement amounts rose slightly in 2023, which is a potential indicator that rates may stabilize, said Colin Daly, Denver-based executive vice president and financial lines practice co-leader at CAC Specialty.
A Cornerstone Research report released in March showed the average settlement amount for securities class actions in 2023 was the highest in more than a decade at $47.3 million, a 25% jump from 2022.
Litigation defense costs are also on the rise, said New York-based Joseph Spallone, head of commercial management liability at Sompo International Holdings Ltd.
“Law firms are charging higher rates to defend these cases because they’re more complex. These cases take longer to settle or resolve, and that just adds to the cost of the claims,” he said.
D&O is currently “in the thick” of the soft market, and insurers are just starting to pay claims from years ago, even before the COVID-19 pandemic, said Nirali Shah, New York-based head of the U.S. directors and officers practice at specialty brokerage McGill and Partners.
“D&O, employment practices liability, and fiduciary liability are longer-tail policies, especially D&O. It can sometimes take up to 10 years to have a claim fully fleshed out and paid. So, you really don’t know your cost of goods sold for quite a few years after you’ve written it from an underwriting standpoint,” she said.
Settlement amounts for securities class actions are rising, Ms. Shah said.
The slowdown of mergers and acquisitions, deSPAC activities and initial public offerings in 2023 reduced demand for some D&O coverage, Mr. Spallone said.
“You have private-equity-owned or portfolio companies that are not exploring IPOs right now because of the valuations. Private equity-owned companies can hold until they feel they get the right price, which is one reason you’re not seeing as many IPOs,” he said.
Conversely, some founder-owned companies have been liquidating, Mr. Spallone said.
“We’ve observed some companies going public, so we’re starting to see activity there,” he said.
Ms. Nirali said the amount of capacity suggests the market will remain soft.
The strong supply of limits, capacity and new markets dictate how the market will operate, she said.
Mr. Daly said he expects rate changes to remain fairly static, with approximately a 5% decrease over the next year.
