Too much, too fast?

Few saw it coming. Going into 2022, most expected rate increases of perhaps 5 to 15 percent in D&O during the year, according to David Thomas (pictured, left), director of financial lines at broker Specialist Risk International. What has happened instead is rates slashed by up to 20 percent at the mid-year renewals, with only a handful seeing modest rises. It has, he said, been a boon to buyers.

“The premium relief, and in some cases retention relief, have been extremely welcomed by our clients, especially after two to three years of significant corrections,” he remarked.

He was joined on Intelligent Insurer’s online hub by Gary Lill (pictured, right), head of professional lines at re/insurer IQUW. As Lill put it, “It’s a very different landscape this year from what it was in 2021.”

The key difference is significant new capacity in the market. “Competition within the past six months has improved drastically,” noted Thomas, with 10 new carriers across London, the US and Bermuda.

“It’s not only new carriers that have entered the market,” added Lill. “Existing carriers who had perhaps retrenched during the last few years and repositioned their portfolio now had a renewed appetite for writing new business.”

Either way, the alteration in outlook is profound.

“The speed of the changes has been pretty astounding over the last six months,” said Lill.

Whether that will prove good news in the long term, however, remains to be seen. After all, while insurers have enjoyed three or four years of rising rates, that followed over a decade of soft market conditions.

The question of sustainability, he noted, remains very real. For now at least, the market remains largely disciplined, and current rates seem sensible. Going forward, however, there is less room for further falls.

“We are at a point where the market is sustainable in terms of rate, but my concern is if we continue at the same pace of change as we’ve seen in the last six months, then very quickly, we could get back to where we were five or six years ago,” said Lill.

Unrealistic expectations

Thomas agreed that previous increases in premiums and retentions mean the rate is sustainable for now. “There’s still stability, but I think everyone’s keeping a close eye on how that pans out over the next six months.”
That’s particularly so since the conditions allowing rates to fall could rapidly change. It is not simply that insurers still face social inflation, general inflation, ESG issues, and “pandemic hangovers” such as supply chain and workforce issues—alongside the real prospect of a recession and rising business failures. More specifically, falling D&O rates significantly reflect a drop-off in the number of class actions.

From 2017, and especially in 2018 and 2019, the US saw historically high levels of securities class actions. Over the last year, however, that number has halved. Some take that to mean exposure has also halved. It’s an unwise assumption, said Thomas.

“By their very nature these class actions typically take three or more years to settle. Settlements in 2021 relate to claims filed in 2017, 2018 and 2019,” he pointed out. “So even though you’ve got the immediate reduction in class action activity, there’s a lot of litigation still in the pipeline.”

There are, in fact, more than 400 securities class action cases still to be litigated.

“There are big limits there, some big programmes; a significant proportion of the S&P 500, for example, were sued in that period, and they buy significant insurance,” agreed Lill. “That still has to play through the system.”

At the same time, another big change is that the number of initial public offerings (IPOs) a significant source of high-value premium for insurers—has “fallen off a cliff”, as Thomas put it.

“There were over 1,000 IPOs last year; we’re down to about 119 this year, and 69 of those were in January and February,” he said. “It must be leaving a big hole in the budgets of insurers, and they need to replace that with new business with volume and premium.”

That’s sustainable for now, but ambitious targets made in July and August last year when the outlook was dramatically different will need to be revised if the industry is not going to avoid past problems, said Gill.

“My hope is that in the second part of the year, underwriters will perhaps go through a reforecasting exercise and moderate their expectations for the second half of the year with more realistic targets as we go into 2023 and beyond,” he said.

“My fear is that if we don’t, we’ll very quickly get back to where we started, and I don’t think that is in anyone’s interests—for brokers, clients or underwriters.”