July 2023 Market Update – Directors & Officers Liability

As foreshadowed in our July 2022 D&O market update and then anticipated in January 2023, capacity has returned to the D&O market. There have been reductions in premium of up to 50 per cent for small-cap publicly traded companies.

It is pleasing that rates have eased, but we have concerns about sustainability across the class. Some new entrants’ are motivated by “top-line” underwriting strategy due to the long-tail nature of the class and the current investment returns available.

We have however observed that policyholders have fresh in their minds the rapid withdrawal of capacity (leading to unavailability of cover, significant uplifts in premium and excess structures) that plagued D&O between 2017 to December 2021.

It may just be “too soon” for policyholders to leave their insurer who supported them when others exited. Boards have resisted moving insurers despite significant savings on the table from some of the new entrants. It appears boards are more inclined to consider consistency in rating, coverage, insurer strategy and claims philosophy over price.

Despite some of the ‘new entrants’ being significantly cheaper, the ‘committed insurers’ (those supporting the class during the recent hard market) have also returned savings to loyal policyholders. See our article here as regards the benefits of insurer loyalty.

Policyholders must be mindful of the recent history of D&O insurance rate fluctuations, as the current economic conditions are very grim. Foreseeable losses are brewing and will likely impact the class (and insurer appetite for it).

Boards are very much apprised of ESG and Cyber risk. Market commentary suggests boards are becoming more risk mature. Our experience reconciles with that commentary, particularly across publicly traded companies. That said, we continue to recommend external experts to help our clients understand their organisational risk maturity, incident response, compliance and ongoing governance. See our article here on the use of third party experts and the impact on insurance contracting.

Returning to the macro-economic issues, ASIC has warned boards as to what its focus is, in the current environment. Solvency.

In its release of 6 June 2023, the Regulator sets out six key areas of attention a board and its advisers should have regard to. All pertain to financial performance and clear disclosure of same. Our article in respect of same may be found here.

In summary, there are considerable savings available in the commercial D&O market. Insurers committed to the class long term are holding rates at a sustainable level so the class may remain sustainable.

It is, in our opinion, unwise for boards to pursue significant savings with insurers that have not demonstrated commitment to the class. We do not consider the current rating is sustainable as clear signs point to the materialisation of losses that will likely impact the performance of the class.