Buyers of directors and officers liability coverage are expected to face “difficult conditions” in the U.S. well into 2021, Marsh has concluded in a new report evaluating the sector.

That means public company customers face the possibility of reducing limits and retaining more risk, among other tough choices.

Rate hikes are one of the primary factors that will drive those difficult decisions, the report found. Marsh noted that D&O pricing for public companies rose more than 50 percent in the 2020 third quarter, with 90 percent of its own clients renewing with rate hikes.

But along with those rate hikes, public companies are paying more for less.

Some carriers are narrowing coverage as underwriters back away from previously available coverage enhancements. In light of these conditions, carriers are talking tough during contract negotiations, Marsh pointed out.

“With competition and capacity limited, insurers are taking more aggressive negotiations on both pricing and coverage,” Marsh said. “This is especially true for harder-to-place risks, including life sciences and technology companies, cryptocurrency market players and companies that are preparing to go public.”

Marsh noted that D&O capacity obstacles aren’t limited to just the U.S. Traditionally, the London market has been a safety value in terms of offering domestic capacity for U.S. companies, but they’re less interested in U.S. risks these days. As well, non-U.S. companies that typically seek D&O coverage from London insurers are looking at the U.S. market and others to help provide capacity.

Faced with all of these obstacles, public companies are forced to make decisions such as reducing their limits or keeping more risk. As well, they focus on looking at potential risk transfer options “where either capacity is lacking or pricing is deemed too egregious,” Marsh pointed out.”

Marsh said that some new players in the market should help moderate price increases and boost coverage capacity in the long run, but it will take time for those remedies to become known.

Marsh added that other factors will place pressure on D&O coverage into 2021, including:

• Derivative litigation, which are suits filed on behalf of a company against individual directors and officers alleged to have violated their duty to the company. These suits are rising rapidly, Marsh said.
• A focus on board diversity. Marsh points out that several public companies already face securities lawsuits demanding their boards become more diverse.
• Social and environmental activism. Marsh explains that “shareholder activism remains a significant concern for public companies and their directors and officers.” With that in mind, activists are pressuring companies through lawsuits and other actions on everything including climate change, enabling more diverse workforces and more.
• A focus on board diversity, which will leave directors and officers in vulnerable positions as they deal with lawsuits and state laws seeking to address diversity challenges. Some new laws include fines if diversity metrics aren’t met.
• Public companies will likely pursue aggressive restructurings in the months ahead, including IPOs, reverse mergers and COVID-driven bankruptcies. Insurers will respond to these actions in kind, Marsh said, adjusting their available limits, capacity and premiums as needed.

The full Marsh report is “Rising Insurance Prices and Intensifying Risks: 5 D&O Priorities for 2021.”

Source: Marsh