Directors and officers liability policyholders are seeing their first soft market in years, but a host of questions are creating significant uncertainty.
These include the economic outlook, which has led to concerns about increased bankruptcy-related claims; an aggressive US Securities and Exchange Commission and Justice Department; and cyber, cryptocurrency, covid-19 and environmental, social and governance related issues.
There’s “a bit of a minefield in front of us that we’re trying to navigate,” said Mike McGuiness, New York-based senior vice president of public claims management responsibility, for QBE North America.
Experts say that with fewer IPOs and the collapse of the private equity market, more capacity has been freed up, prompting new and established insurers to compete more vigorously for the remaining business.
While D&O rates are declining, it̵7;s unknown how long that will continue, experts say.
The tipping point will be when excess capacity dries up and rates fall below breakeven, said Matthew Azzara, head of management responsibility for North America for Allianz Global Corporate & Specialty SE.
As of last year, overall D&O rates have declined by several percentage points, with declines particularly sharp in surplus tiers, where new capacity is generally focused. Insurance companies are generally not increasing the limits, experts say.
“I’ve been surprised at how quickly rates have fallen,” and it remains to be seen how low the floor will be, said Priya Cherian Huskins, a San Francisco-based partner and senior vice president at brokerage Woodruff Sawyer & Co.
“We’re still not back to where we were in the tough market, but the question on everyone’s mind is what’s going to happen in 2023,” said Kevin LaCroix, Beachwood, Ohio-based vice president of RT ProExec, a division of RT Specialty LLC.
He said that while some have predicted the market will bottom out, he is “a little more skeptical.”
Some insurers “are holding the line and slowing the increases, but we still see an overall downward trend for some time,” said Larry Fine, New York-based head of liability insurance for Willis Towers Watson PLC.
Also, the more than 30 new D&O markets that recently entered the sector “haven’t started to take off or consolidate yet,” while the increased premiums that insurers had anticipated from SPACs and IPOs didn’t materialize, he said.
“We just have to make sure these insurance companies are here to stay” and that they are financially stable, said Devin Berensheim, New York-based executive vice president, specialties practices, with Lockton Cos. LLC.
Renewals in the first quarter will be more telling as accounts that had declines last year are being renewed, said Patrick Whalen, a New York-based underwriter on Beazley PLC’s executive risk team.
“There’s a lot of talk in the market about stability,” with insurers pointing to the inventory of claims from previous calendar years that have yet to be settled, said Tim Fletcher, Los Angeles-based managing director of Aon PLC’s U.S. financial services group. States.
They are “talking about trying to hold the line,” and at least for the next few months, “we expect a similar pricing environment” to the current one, he said.
There is plenty of capacity and competition among established and newer insurers, LaCroix said.
Other factors can also change the market, said David Lewison, senior vice president and national professional leader for Amwins Group Inc. in New York. “There’s always something happening with wildcards that changes the market a little bit.”
The economic uncertainty, with higher interest rates and a jittery stock market, is often cited as a concern by D&O experts. The S&P 500 is down 19.44% for 2022.
Litigation tends to increase when the stock market tightens, which can affect D&O, said Ernest Martin Jr., a partner with Haynes & Boone LLP.
The concern is “whether we’re going to have a tough financial year in 2023,” said Andrew Doherty, New York-based national manager and professional risk solutions leader for USI Insurance Services LLC.
“I don’t think we’ve started to see the full impact of the high inflation environment on corporate earnings,” as businesses anticipate the impact of federal policy, McGuiness said.
Incomes continue to be supported by a strong labor market, but that money is running out, he said. “We’re now seeing a wave of corporate layoffs” that will lower consumption and increase the risk of missing profit estimates, he said.
Depending on how the economy develops, some assessors expect more bankruptcy-related claims.
“I expect to see an increase in claims because of the headwinds that many of these companies still face,” Azzara said, adding that he expects insurers to review the companies’ capital, earnings and liquidity.
“I expect an increase in bankruptcy activity over the next 12 to 18 months,” Mr. McGuiness said. “We’ve seen a lot of immature and specialized companies come to the public markets over the past two years,” particularly in the SPAC sector, he said and predicted that they will not find the capital they need.