What’s driven a D&O capacity influx?

In the past 12 months, D&O coverage has experienced a growth in capacity with 32 carriers entering the fray by 2022, according to Gallagher.

The boom is due to several factors, including:

1. The prices for the policies are quite favorable
2. Claims are declining
3. Retentions earned by insurers are increasing, making the associated risk of insurers less burdensome.

“Along with the increase in capacity, there has also been an influx of private equity into the market,” said Jennifer Sharkey, managing director for Gallagher’s management responsibility.

During an interview with Insurance Business, Sharkey discussed how new businesses writing D&O policies are making pricing more competitive, the types of claims that pose a concern for of insureds and insurers, and the challenges of ESG initiatives.

32 new carriers will enter the market

The 2022 influx of 32 new carriers into the market opens capacity for D&O insurance.

“What has resulted is a significant rate reduction from 2022 to this year,” Sharkey said.

However, the rate of decline has slowed considerably.

“Highly competitive programs and products saw slight declines, while clients entering the transition phase from coverage written prior to this capacity increase witnessed significant decrease,” added Sharkey.

While increased capacity is a favorable market trend for buyers of D&O coverage, insurers that traditionally offer this product must submit to new pricing trends as a result.

Since there are no new businesses emerging, insurers have to stay in business by being more diligent in keeping the renewal books.

“As these new companies enter the market with more competition, traditional insurers will have to adjust theirs to maintain the D&O portion of their business,” Sharkey said.

In addition, these new insurers come without the baggage of any legacy claims, which guarantees that the prices will be aggressively priced.

More established companies and corporations are choosing to follow this market trend because, as Sharkey thinks, “they don’t want to turn their backs on premiums.”

Claims that never stop

Insurers that provide coverage to publicly traded companies are especially aware of Fortune 1000 claims, which have proven problematic.

“These tend to be Side A claims, so sometimes the deductible doesn’t apply,” Sharkey said.

Settlements for these claims can be very significant, especially if they are paid in cash. This proved to be a concern from a loss prevention angle, as the sources shed new light on D&O liability insurance.

Bankruptcies also present difficulties for insureds and insurers. However, this type of loss does not lead to claims immediately, because there is a long-term result while the logistics of filing are sorted out.

“In the future, at least a year or two, we will have a clearer picture of what losses have been incurred,” Sharkey said. “But we’re just seeing more filings today, so that’s something to watch.”

“Damned if you do, damned if you don’t”

Another topic related to the discussion of directors and officers is ESG, especially as it relates to some malpractices at the executive level.

“Damned if you do, damned if you don’t” said Sharkey.

If you do not write ESG-related initiatives in a coverage, there will be a significant explosion, and for those who adopt them, there will always be criticism of omissions.

When it comes to trends related to ESG and directors and officers, there are claims emerging around diversity boards, as well as greenwashing practices in relation to environmental work.

The US Securities and Exchange Commission (SEC) will come out with several guidelines around ESG in October, which will give businesses and organizations more insight into what they can expect when adopting this initiative.

“In the meantime, companies are just trying to pivot and be really careful about their ESG disclosures to avoid any further litigation or scandal,” Sharkey said.