US Public Company D&O Insurance Market Sees Pricing Relief, Strong Competition

For the first time in four years, it is likely that an increasing number of public companies will, on average, experience a year-over-year decrease in their US directors’ and officers’ liability (D&O) insurance premiums in the second half of 2022. Material premium increases have become increasingly rare, and there is a dramatic return to competition in the marketplace as insurers look for new sources of revenue.

Despite a return to competition, the underwriting community remains focused on several risk areas including legal and regulatory trends; activist investors; environmental, social, and governance (ESG) issues; and other challenges that could lead to litigation. Companies should optimize opportunities, but also remain vigilant in their renewal preparations, and work with their brokers to carry out comprehensive reviews of policies and obtain the broadest coverage possible.

Pricing for Public Company D&O Insurance Continues to Ease

In the first quarter of 2022, the average public company experienced a premium increase of 2.7 percent for its total program, the seventh consecutive quarter in which pricing increases trended downward. In both March and April, Marsh McLennan clients saw this trend continue, on average, at renewal. Such favorable pricing may not, however, be available to companies that face open claims, sizeable stock drops, earnings challenges, or other legal matters.

Pricing changes are being driven by a dramatic upswing in an already established trend of increased competition among legacy insurers and new market entrants. The sharp decrease in companies going public—a notable source of new business revenue for insurers—is pushing many to seek revenue in the form of new premium dollars elsewhere. Given the ever-expanding risk landscape for public company directors, companies should be selective in choosing their carrier partners and should pay extra attention to even small nuances in coverage differences between insurers.

Global Events Continue to Raise Underwriting Concerns

Insurers continue to raise concerns about the broader economic environment and how companies plan to confront various risks. These challenges, including stock market volatility, supply chain issues, inflation, and heightened cyber threats, have caused some companies to miss earnings guidance or expectations, leading to shareholder lawsuits accusing them of inadequate risk disclosures.

Companies, therefore, must demonstrate to insurers that they are well positioned to address these issues and have adequately described these risks to investors. Despite the improving pricing environment, the threat for securities claims and derivative actions remains high, and there continue to be sizeable settlements in various cases.

Shareholder Litigation Threat Remains Elevated

Shareholders continue to bring securities fraud claims against public companies and boards, with 95 federal securities class actions filed through June 9. In all of 2021, there were 211 such actions, down from 319 in 2020. While the total number of these claims trended down over the last two years, they remain elevated compared to historic levels.

Event-driven litigation, in particular, continues to result from various adverse company events involving employee discrimination or harassment claims, cyber breaches and privacy matters, environmental disasters, and regulatory investigations, among others.

Shareholder derivative actions continue to settle for large amounts, though numbers have dropped from the record-breaking years of 2019 and 2020. Shareholders are raising claims alleging oversight failures on behalf of board members, with oversight shortcomings typically involving a purported failure of company boards to set up an adequate reporting system for mission critical risks. Or, where such a reporting system is constructed, shareholders may claim that the board ignored so-called red flags. We have seen these types of cases following cyber events, food safety outbreaks, opioid matters, false claims act violations, and #MeToo movement-related claims, among others.

Developments on the Regulatory Front

The US Securities and Exchange Commission’s (SEC) focus is on ESG issues, cybersecurity disclosures, executive compensation, insider trading, and special purpose acquisition companies. The SEC’s formation of an ESG Task Force has already resulted in some companies facing regulatory scrutiny over alleged inadequate ESG disclosures.

Additionally, earlier this year, the SEC proposed new disclosure rules that are presently the subject of public comment and debate. The proposed rules on cybersecurity disclosures require a more robust reporting of the board’s focus and credentials on cyber matters and on reporting material incidents to shareholders. The proposed rules on environmental matters would require companies to disclose a broad range of data on emissions and climate impacts, as well as offer detailed information about the broader effects and opportunities presented by the global transition toward renewable energy and carbon neutrality.

Companies Should Focus on Structuring Optimal D&O Programs

While the risk landscape presents numerous challenges, the improved public company D&O market conditions should afford organizations and their brokers greater leverage in negotiating insurance policy terms and conditions. Many insurers are choosing to introduce new policy forms as competition heats up and are more receptive to bespoke coverage solutions and enhancements.

Buying the appropriate amount of coverage is critical, and companies should use data analytics and personalized damages modeling, along with peer benchmarking, to assess what is right for them. Brokers can provide an understanding of settlement size trends to help companies select the amount of coverage that is suitable.

Financial strain is placing some companies under the heightened threat of shareholder derivative actions; individual directors and board members should ensure that adequate Side A insurance coverage is available to protect their personal assets when a company is prohibited or financially prevented from indemnifying those individuals against claims.

As the claims environment and regulatory activity continue to evolve, the D&O marketplace will also shift. It is therefore important for companies to be informed on trends that can impact their risk profile and D&O programs.