Banking crisis may lead to US D&O market hardening

The high-profile federal takeover of two mid-sized US banks will create a ripple effect that could affect the cost and availability of D&O insurance in the financial sector, but how things will ultimately settle is unclear, experts say. While D&O rates have softened over the past several months, the Federal Deposit Insurance Corp’s (FDIC) takeover of Silicon Valley Bank (SVB) and Signature Bank earlier this month may lead to higher rates and reduced capacity, they add. On Monday the FDIC announced it would break up SVB Financial Group, the parent of SVB, and hold auctions for two of its units. In a related development, First Republic Bank received a $30bn cash infusion last week from several major banks to try to stop problems from spreading. In light of the crisis, established D&O insurers may leave the banking sector, although they may be replaced by new capacity that has entered the market in recent months. Banks should also expect close questioning by their D&O insurers during their next renewals. SVB and Signature Bank have each been hit with a putative class-action lawsuit, and many more lawsuits are expected. Experts believe litigation will likely include derivative lawsuits that charge directors with breaching their fiduciary duties, and federal regulators may also file lawsuits. But the timing of the banking crisis has limited its effect on the D&O market, observers add. If the crisis had struck 18 months ago, when capacity was more constrained, it would have posed more of a problem, said Kevin LaCroix, executive vice president for RT ProExec, a division of R-T Specialty. Now, however, even if current insurers leave the market, new carriers may be willing to step in, he said. “There are a lot of dynamics in play”, and it is too early to determine how the situation will develop, LaCroix added. Despite the high-profile nature of the US bank takeovers, they may not lead to a dramatic pricing changes in the softening D&O market. “Sitting here today, this is an event that doesn’t seem severe enough” to have a significant effect on premiums, said William G. Passannante, a shareholder with Anderson Kill PC. “The feedback we’re getting from the market is damage control,” said Joe Catalano, executive vice president for professional lines at Amwins Group. At least one large insurer said it is not renewing cover and exiting the space, and others are seeking to determine whether other banks face similar risks to SVB and Signature Bank, he said. “There will definitely be some contraction in capacity” in upcoming weeks, believes Catalano. “I do expect rates to flatten out or maybe increase.” D&O insurers are assessing other banks that may be on their watch lists, as well as related issues including the role social media has played in the crisis, said Jenny Fraser, an Amwins vice president. She was referring to reports that social media posts warning depositors to withdraw their funds from Signature Bank created a panic that led to its takeover. There will be more stringent underwriting “that may spill over into underwriting in general”, with insurers looking more closely at deposits, investments and choice of lending institutions, said Sherilyn Pastor, a partner with McCarter & English. “There’ll be questions about the tentacles that might spread” to nonbank financial institutions and the exposure they might have to banks that are in trouble or could run into difficulties, said Andrew Doherty, US national executive and professional risk solutions practice leader for USI Insurance Services. There is also a more general concern about the implications of rising interest rates. “We have noticed an increased hesitancy by insurers just because of the adverse impact of the economy” that may emerge from these events, said Tom Orrico, managing director of financial institutions at Lockton. This article first appeared on our sister website Business Insurance. For further news from Business Insurance, please click here.

Banking crisis may lead to US D&O market hardening

But some experts say too early to tell impact

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