Is the D&O market beginning to recover after some tough years?

If you work in the directors’ and officers’ (D&O) space, you are certainly aware of the phenomenon, in 2020, when rates increased by as much as 70 percent. To look at this, Gallagher has done some work, releasing it as “Global State of the Market Report for D&O”. The company’s managing director David Ritchie spoke to Intelligent Insurer to talk about its findings.

Why did the company pick this subject to tackle? “The past three or four years have been very interesting in the D&O market and very difficult for our clients. We wanted to give a bit of good news for a change,” Ritchie said.

So far, he said, there have been real improvements in the sector. “The market started to soften, with increased capacity and increased competition, probably in the middle of last year. We’ve seen an acceleration of competition and capacity into the marketplace, which has given favourable results to our clients,” he explained.

What happened to the D&O sector a few years ago was that the rising cost of litigation began to push, and have a similar effect on, the cost for insurers to back this sector.

“You have to look at the relative chances of claims being made in the D&O lines at that time,” Ritchie said. “Four or five years ago, it would have been US-listed life science companies with relatively high notification and claims rates, and a well-trodden litigation path. Actuaries can get their heads around that quite easily.”

But a few big insurers leaving the sector, other insurers pulling back on limits, and increased underwriting discipline adversely affected the market.

Litigation, too, was key. The D&O report says: “Another factor is the price rise of defence costs for US attorneys. The figure is set at a time well in advance of the date on which such costs are paid. Previously, these rates were around $700 to $800 per hour; now they are $1,600 to $1,800 per hour.”

Ritchie took up the thread. “Four or five years ago, the litigation spread and the plaintiff bars in different territories got creative in how they could bring lawsuits and in their access to D&O policies,” he said.

“The market witnessed relatively benign risks that they thought were vanilla but turned out to be quite exposed without their realising. That’s a tough place for actuaries and insurance companies to be because they’re then trying to predict the outcome of litigation, which is very difficult.”

This had an effect on rates, with some tripling in the last few years. Even a “very vanilla” risk, said Ritchie, was affected. He used the example of a UK plc without any US exposure. “Those rates went up over the past three years by 15 to 20 times what they were in 2016. That’s very difficult for clients,” he said.

Future concerns

The ship appears to have turned in recent years. “If you’ve been underwriting D&O as a class of insurance from 2010 or 2011, the historical liabilities in your book were really giving you a lot of trouble in 2018, 2019, and 2020. That led to the management of some of the insurance companies running out of patience and they thought the book couldn’t be profitable, with the tail continuing to catch up with them. So they threw in the towel,” Ritchie said.

The loss of big insurers such as AXA XL which, Ritchie said, was the largest in London by gross written premiums at the time, gave clients and insurers huge headaches.

“Fast-forward to 2021 and rates are still at historic highs, with claims relatively benign compared to 2018, 2019, or 2020. That looks attractive, all of a sudden, to new capital coming into the marketplace. And those rates, at historic highs by any metric, led people to feel that D&O could be profitable,” he added.

It is now 2022, and the COVID-19 pandemic has—and will continue to have—some impact on the market, said Ritchie.

“The initial claims were what we’d expect to see, with maybe the cruise lines and the airlines making forward guidance that it was difficult to manage or meet their stock market expectations. Those claims are pretty obvious.

“You have billions pumped into R&D and PPE firms because of the pandemic. They will be challenging because we don’t know what the future will look like. That doesn’t sit easily with D&O insurers and they have challenges in pricing. So while the pandemic has eased, the uncertainty of the marketplace remains pretty difficult,” he said.

That aside, Ritchie thinks the market should continue to soften into 2022 from a purely supply and demand viewpoint.

“All the insurers that participate will have high growth targets this year and, in a falling market, you have to broaden your appetite, which is something that increases competition.

“The two aspects I would caution on, however, would be inflation and interest rates. Money isn’t free any more and we expect that to create some liquidity strains, which will give rise to D&O claims,” he concluded.