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US D&O increases moderating but SPAC IPOs causing concern

Most US companies continue to experience increases in total cost and retention on their D&O programmes in 2021, but the rate of these increases seems to be decelerating, according to Woodruff Sawyer.

The broker’s 2022 D&O Looking Ahead Guide states: “While flat premiums and decreased premiums at renewal are still rare, we saw twice as many of these more favourable outcomes as of mid-year 2021 than we saw in all of 2020.”

Woodruff Sawyer says the median total D&O programme cost increase for all of its clients for 2021 is 26%, but this reflects the fact that the pool of its clients is more heavily weighted towards life science, technology and newly public companies, compared to most brokerages. Brokers placing clients with less challenging risk profiles should, of course, see lower blended rates of increased pricing, says Woodruff Sawyer.

It also points out that during 2019, the median change in total D&O insurance programme cost was 31% and in 2020 it rose to 38%, so the 26% shift for the first half of 2021 is “a welcome change”.

The report states: “While pricing challenges remain for D&O buyers, new capacity and new competition are finally on the way with a dozen new entrants to the D&O insurance market. Usually when new carriers enter the D&O insurance marketplace, they help to right-size pricing, saving D&O buyers money on premiums. We’re hopeful this trend starts to take hold once again in 2022.”

One particular area was highlighted by the Woodruff Sawyer guide. It notes that the first half of 2021 saw an unprecedented number of Special Purpose Acquisition Company (SPAC) IPOs. The recent surge, and the scarcity of insurers willing to provide insurance for SPACs, has seen SPAC IPO D&O insurance premiums increase significantly. According to Woodruff Sawyer’s proprietary client data, SPAC D&O premiums increased four to five times between Q1 2020 and 2021.

“With the enormous number of SPACs looking to identify a merger partner, the question looming over the D&O insurance market is: Are there that many private companies ready for the scrutiny that comes with being a public company? Unsurprisingly, insurance carriers are pricing their risk concerns into their D&O premiums for de-SPAC transactions,” the guide states.

Priya Huskins, senior vice -president, management liability, Woodruff Sawyer, saidcommented: “A significant cause of the high price of D&O insurance has been duplicative federal and state court Section 11 suits filed against IPO companies. Woodruff Sawyer organised the funding for the successful Sciabacucchi vs. Salzburg appeal. That decision has been a game -changer for IPO companies, resulting in the dismissal of state-filed IPO cases.”

She added: “As a result, duplicative filings are down dramatically in 2021, from 52% of total Section 11 IPO filings in 2020 to 18% in 2021 so far. The elimination of duplicative state court suits means the elimination of the type of extortionary settlements some plaintiffs were able to achieve due to quirky differences between the procedural rules of state and federal courts. This is a win not just for D&O insurance carriers; it’s also a win for corporate America.”

Underwriter survey
The results from Woodruff Sawyer’s fifth- annual Underwriters Weigh In survey were, for the first time in a long time, a little bit encouraging, said the broker. Only 54% said D&O insurance premiums would go up over during the next year, compared to 100% of underwriters who predicted rate increases last year.

The survey of underwriters found that they continue to be concerned that their insureds are not fully aware of the high cost of litigation, said Woodruff Sawyer. It found that 74% of underwriters believe that companies underestimate the current risk and cost of litigation. In addition, 82% of underwriters feel that the governmental regulatory environment is getting more difficult for public companies.

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