The 2023 outlook for Directors and Officers (D&O) Liability coverage is filled with some level of uncertainty as we continue to face challenging economic pressures amidst a transitioning rate environment. Buyers have recently benefited from improving rate trends most directly tied to the decreasing frequency of Securities Class Action lawsuits (SCAs) since 2020. As the economy faces sustained (and in some cases growing) pressures that many feel will lead us into a recession, how will the D&O insurance market respond? I have some thoughts.
Securities Class Action Lawsuit Metrics
SCAs are one of the most reliable metrics when looking at the health of the D&O market. These cases are well documented and scrutinized given their nature and potential severity. When SCAs increase in volume and severity, D&O rates tend to follow in unison.
The insurance market experienced a record volume of SCAs from 2017 through 2019 (over 400 annually!), driven primarily by merger objection lawsuits.
In 2022, the volume of lawsuits fell below the 30-year average (196 – FY2022). The once prevalent merger objection matters are now almost nonexistent, but cyber-related suits, COVID-19 disclosure failures, and special purpose acquisition company (SPAC) activity have all contributed (and continue to contribute) to an active SCA pipeline.
As a result of the record-setting SCA environment, the unknown of COVID-19, and the historical underpricing by insurance carriers, the D&O market went through the most significant correction since the 2008 financial crisis.
As carriers rely on the performance of both their publicly and privately held portfolios, these litigation trends effected the entire marketplace with varying levels of intensity.
Conversely, starting in late 2021, we saw rates not only stabilize but begin to subside through increased carrier profitability and competition. The only question now is whether this “softening” trend will continue, and if so, for how long given the economic pressures we are experiencing?
The Impact of Industry Pressures and a Recession
Pressures like inflation, supply chain disruptions, increased interest rates, and employment challenges (just to name a few) have been established in the current economic environment and have already taken their toll.
As mentioned, many predict that we are headed into a recession in 2023. Knowing this, businesses will face strain on their revenue streams, debt financing challenges, and depleted margins/profitability.
As profits fall for public companies and the number of insolvencies increase throughout the private sector, we can expect to see a resurgence in D&O-related litigation.
D&O Liability Coverage in 2023
Looking ahead in the short-term, both public and private buyers of D&O Liability coverage will enter into the 2023 calendar year in a favorable buying position. Rates are subsiding on the heels of lower SCAs, and new entrants into the D&O market have created increased competition. Additionally, with the slowdown of initial public offerings (IPOs) and mergers and acquisitions (M&A) volume, there are fewer new business opportunities for carriers to generate growth, thus creating a more competitive market for D&O buyers.
With the larger macro-economic issues facing the market today, there is question as to how long this favorable buying environment can last. The economic factors mentioned above contribute to an environment more prone to D&O litigation. Couple that with the fact that event-driven litigation remains high, executives are facing more scrutiny over cyber-related matters, and the Department of Justice (DOJ) is acting more aggressively toward anti-competitive behavior, and a formula for upcoming challenges presents itself.
Through a longer lens, we believe these continued economic pressures will force the D&O market to stabilize, and potentially harden, and rates and insurance carriers will turn inward to further scrutinize risk with more vigorous underwriting. Attempts to differentiate will involve product innovation and predictable risk appetites rather than through rate competition. This will create an opportunity for D&O buyers to refocus on the quality of their insurance transfer and prioritize the importance of partnering with an experienced, qualified broker to help them navigate this changing environment.
I realize this topic can be difficult to understand. There are a lot of nuances to D&O Liability coverage, litigation, trends, etc. If you have questions about any of this, please don’t hesitate to reach out. Our team is well-equipped to walk you through all of this and ensure you’re on the right insurance buying path
