D&O market begins to stabilise for European buyers but insurers remain wary

D&O pricing in Europe has begun to stabilise but underwriters remain cautious, amid heightened risks from the post-Covid-19 economic fallout and emerging issues like ESG and cyber.

New capacity and entrants to the market have helped slow D&O rate increases during recent quarters in Europe and the US, which has enabled insureds to increase limits, according to Marsh.

D&O pricing for US publicly traded companies increased just 6% in the fourth quarter, lower than the 10% increase observed in Q3, the broker says in its latest Global Insurance Market Index.

In the UK, the rate of increase for D&O cover was 24% in the fourth quarter, compared to 61% in the preceding three months, according to Marsh. It describes the continental European D&O market as “stable” as a result of increased insurer competition, appetite and capacity. Select programmes even experienced rate reductions, Marsh says.

In its recent state of the market report, AJ Gallagher says increasing underwriting competition is leading to more significant rate reductions for directors and officers. According to the broker, the global D&O market is now seeing signs of stabilisation, following price increases of about 70% in 2020. New entrants and the recent reduction in US securities class actions support rate reductions in 2022, although rising defence costs and increased underwriting discipline will act as mitigating factors, it adds.

NO TOTAL TURNAROUND

Despite talk of stability returning to the D&O market, corporates buyers are unlikely to see significant market softening, Astrid Faber-Wieners, general manager and head of underwriting for professional lines at HDI Global Specialty, told Commercial Risk Europe.

“Although some markets are sending light signals of stabilisation, a complete turnaround is not on the horizon. Primaries and international programmes for large corporates and specific industries like financial institutions and Covid-impacted sectors, for example, are unlikely to experience high levels of relief in the near future. This applies all the more as the large loss situation remains extremely tense, accompanied by a rising frequency of smaller claims,” she said.

Tough market conditions may be a feature for some time yet, with the pandemic and current economic gloom exacerbating an already hardening D&O market, according to Faber-Wieners.

“As part of their underwriting, insurers are paying attention to sectors and regions particularly exposed to these developments, both when writing new business and when renewing contracts. Bearing in mind that for more than a decade, soft market conditions had an influence on every insurer’s D&O book, further measures are needed to return to profitability,” she said.

MORE COMPETITION

The most recent January renewals did see a “bit more competition” in the market, according to Mathieu Borneuf, senior vice-president of professional lines in continental Europe at Sompo International, London market and Europe. “There is definitely more capacity than there was this time last year. Across Europe, we still saw rate rises average out at about 11%. Insurers are maintaining underwriting discipline and if all things remain equal, we could expect a slowdown in rate rises this year,” he said.

Although the D&O market in Europe hardened later than in the UK and the US, it is already showing signs of stabilisation in some countries, added Borneuf. But certain markets remain “underpriced in our view”, he said. “Southern Europe, for example, is particularly dependent on tourism and has been hit hard by Covid, and we may see claims start to raise there in the coming year,” said the insurer.

Underwriting discipline is also supported by the volatile and uncertain risk landscape for directors and officers. Covid-19 financial market uncertainties are adding to growing concern over emerging risks like cyber and ESG.

“The current short-term view of many insurers is certainly focused on potential Covid-19-related effects like the expected increase in bankruptcies. Cyber-related D&O claims are currently very much in focus as well. Related incidents could well attract the interest of regulators, shareholders and even customers, and it can be assumed that the number of such claims will increase in future,” said Faber-Wieners.

“In the medium to long term we will most probably see new challenges for buyers and insurers resulting from ESG-related topics and the associated expectations of investors and clients. Awareness in these fields is rising but the willingness to invest in the necessary measures still needs to improve. The VUCA [volatility, uncertainty, complexity and ambiguity] environment we are living in will have a long-lasting impact on how company leaders will be assessed, and in case of failures they will be held responsible,” she said.

RISK LANDSCAPE

Faber-Wieners noted that the D&O risk landscape is constantly shifting. “A range of stakeholders including shareholders, employees, customers, suppliers, regulators and authorities are now closely observing the activities of international companies and their decision-makers. Local legislation and regulatory requirements are constantly developing and varying from country to country,” she said.

“European regulation, Brexit and other conflicting bilateral interests are also contributing to this volatile setup. The complexity of legislation means that it is essential that risks are understood, and that individual and robust compliance and risk management systems are in place,” Faber-Wieners continued.

One issue of particular concern for D&O underwriters is bankruptcies, which have been at a record low during the last couple of years, said Borneuf. In France, for example, bankruptcies have fallen by almost 50% during the past two years, he added.

“Clearly, these have been exceptional times and we won’t see the clear picture until the widespread government financial support that has been in place for companies through the pandemic is lifted. There is clearly a large number of zombie companies still trading that will likely go under this year or next, prompting a wave of claims,” Borneuf said.

Insurers are also keeping an eye on regulatory actions and exposures to US securities class actions, he continued. “There’s also a continuing trend of heightened regulatory risk – more and more investigations are taking place. This is especially an issue for European companies with securities in the US, who remain more prone to being targeted by litigation funders or activist shareholders than their US counterparts,” said Borneuf.

US federal securities class actions actually fell 34% in 2021 to 210, well below the yearly average of 405 for 2017 to 2019, when they surged. According to a recent report from law firm Dechert, securities class action filings against non-US issuers also fell 35% last year.

“Although there were actually fewer US securities class action in 2021 than in previous years, it may be the case that we are simply seeing a reservoir of cases building up that have been out on hold due to the pandemic. This may result in a breaking of the dam in the coming year, with a wave of actions being brought,” said Borneuf.

According to AM Best, the pace of securities-related litigation could increase in 2022 as plaintiffs focus on special purpose acquisition company (SPAC) transactions, cryptocurrency or event-driven suits.

The ratings agency also notes in a recent report that defence costs for D&O claims are increasing. The loss ratio for the US D&O market has worsened even as premium has risen, it says.

“Market observers have noted that D&O trends reflect the growth of what is being termed a new global investment class related to litigation financing, epitomised by the funding of group securities class action suits. Additional risk factors such as sexual misconduct lawsuits, discrimination cases and the failure to disclose or address climate risks, are all contributing to the uptick in D&O lawsuits, settlements and payouts – and leading to higher premiums,” AM Best states in the report.