State of the Market for Directors and Officers

In our experience since the beginning of 2018, the Directors’ and Officers’ (D&O) and management liability markets have continued the extensive hardening that we first saw signs of in 2017.

In 2017, insurers remained focused on two main areas:

• Rectifying their USA-listed pharmaceutical business portfolios, following a huge increase in the number of securities class actions in the sector; and
• Re-evaluating their crime insurance portfolios, where insurers had not coped with the emerging social engineering exposure.

2018 has brought a renewed focus on all risks, which has spread to all areas of the D&O and management liability market, with a determination of carriers to write profitable portfolios. This is due to various factors:

• A deterioration of past claims. Most major management liability insurers have not made an underwriting profit since 2011;
• A bad hurricane season for the property and casualty insurers made the need for correction of unprofitable books more urgent;
• The continuous flow of new securities class actions, particularly in the US and Australia, albeit at a slightly lower rate than in 2017;
• Adverse precedents, such as the Cyan case, which allowed for US securities class actions to be heard in State courts as well as Federal courts; and
• An increase in unexpected litigation in territories where these levels of high-profile litigation was not anticipated - such as Carillion (in the UK) and Steinhoff (in South Africa).

All of the above has created a volatile insurance market where:

• Pricing and retentions are increasing (we have witnessed increases of over 100%). This is almost irrespective of a company’s financial and operational performance. Decreases are virtually unobtainable;
• Excess insurers are no longer following the terms set by the underlying insurers on rate. They are increasingly quoting at the rates required for certain attachment points, based on the risk exposures;
• Many insurers are also reducing or ventilating their capacity. With few ‘new’ insurers ready to participate at the current rates, brokers frequently need to restructure programmes; and,
• The smaller limits being offered by insurers on the lower layers of programmes may also limit the amount of capacity that it is possible to source for the largest D&O placements.

In addition, as D&O and management liability lines are long-tail business, it is common to see complex claims being resolved up to five or six years after the purchase of the policy. Some of the largest post-financial crisis claims are beginning to settle at larger than expected values and we expect that some insurers’ portfolios may struggle to support multiple large claims payments over a short period.

With regards to policy breadth, for the time being, the cover being offered by insurers has not been affected widely. Much of the small and mid-sized company business is still being written using broker-designed wordings and much of the largest business is still on bespoke wordings - providing clients with an advantage. Furthermore, we have not seen the traditional ‘hard market’ endorsements coming back onto policies in any meaningful way. The vast majority of renewals should expect a challenging year.