US Private and Not-for-Profit Companies Still Face D&O Insurance Headwinds as Market Improves
Many private and not-for-profit companies purchasing directors and officers’ liability insurance (D&O insurance) in the United States are still experiencing increasing rates and sometimes difficult terms, a trend that has persisted for more than two years.
While premium pressure has notably decelerated since the second half of 2020, increases have remained steady in the low double digits over the last three quarters. And the percentage of private companies among Marsh’s clients experiencing rate increases has also gone down slightly, from 73 percent in the fourth quarter of 2021 to 69 percent in the first quarter of 2022. Pricing changes in April and May continued to trend further downward, with average increases in the single digits, indicating that competition among insurers continues to improve.
These improvements are mostly due to broader competition in the insurance market, which may lead to further pricing deceleration over the next few quarters. Increased insurer competition was particularly impactful in D&O excess layers, causing total program premium increases to be lower than primary increases for the last three quarters.
As competition improves, private and not-for-profit companies must remain focused during renewals, fully answer insurer questions, address any concerns, and highlight attractive aspects of their risk profiles. Whether a company is a small start-up or a unicorn with a $1 billion or higher valuation, it is critical to work with brokers to attempt to obtain the most comprehensive coverage available in the market.
Pricing Lower Than Peak Increases, But Deceleration Has Leveled Off
The average private company experienced a premium increase of 11.6 percent for total D&O programs in the first quarter of 2022. This is down only slightly from 12.8 percent in the previous quarter and in line with the 11.4 percent average private company increase in the third quarter of 2021. While pricing deceleration leveled off in the first quarter, these increases are far below the second and third quarters of 2020, where average total program pricing increased more than 20 percent. This downward trend has continued in recent months.
Private companies with revenues between $250 million and $1 billion experienced the largest primary increases in the first quarter of 15 percent on average. This increase is, however, down from the average of 21.5 percent that Marsh clients in this category experienced in the fourth quarter of 2021, an ongoing sign of market improvement. Private companies with revenues of more than $1 billion saw average total program increases of 13.7 percent. Underwriters view the often-complex ownership structures of larger private companies as presenting a heightened risk of investor claims compared to smaller organizations.
Underwriters Remain Concerned About Private Company Exposures
Competition has increased in recent months, but private company D&O insurers—both excess and primary—continue to scrutinize all opportunities. Insurers are asking more questions before offering terms. They are increasingly concerned about antitrust losses, and it is not uncommon for insurers to seek to limit antitrust coverage.
Consumer class actions, breach of contract, and claims by major shareholders without board representation are other specific areas of concern. Some insurers are proposing major shareholder exclusions to confront this heightened risk. Insurers have also sought to strengthen existing exclusions for exposures involving products, professional services, false advertising, government funding, and cyber loss due to claims activity.
Carriers are seeking to impose additional restrictions on businesses deemed high-risk due to their industry, ownership structure, or financial distress. These include limiting exposure for creditor claims and bankruptcy matters. It is critical for companies to work with their brokers to combat any such attempts to add these restrictions, often by providing supplemental information beyond renewal applications.
Private companies often bundle their D&O insurance with coverage for employment practices and fiduciary liability, and losses in those areas have also contributed to D&O rate pressure. Despite initial concerns, most insurers are not attempting on a broad scale to limit coverage for layoffs resulting from the pandemic or other COVID-19–related employment claims.
With regard to larger private companies, particularly those with revenues of more than $1 billion, carriers may seek to limit coverage for the entity to investor-related claims only. This is similar to how public company D&O policies are structured, which some carriers view as appropriate for larger private company risks.
Prepare for Underwriting Discussions and Renewals
As noted, insurers are scrutinizing companies’ financials. And while certainly not unique to private companies, insurers are seeking details about supply chain snags, inflation, hybrid work environments, and lingering COVID-19 impacts. Because private and not-for-profit companies have far less information readily available than public companies, it is critical to engage underwriters to help present your risk during your underwriting submission.
Companies are going public at a dramatically slower pace than they were last year. Many private companies are monitoring the market for a viable window to complete a traditional initial public offering, engage in a reverse merger with a special purpose acquisition company, or pursue a direct listing. For those companies considering going public, underwriters will seek as much information as possible about company plans.
Following a broader global trend, insurers are also reviewing companies’ governance principles and procedures, as well as environmental, social, and governance initiatives. Comprehensive underwriting presentations are a good opportunity for companies to inspire confidence in insurers that they are adapting to regulatory and social trends.
Closely Review Policy Language and Analytics to Structure the Optimal D&O Programs
Securing the most comprehensive coverage for your company is heavily dependent on a robust effort to educate insurers during renewals. It is also critical to work with your broker to carefully review the implications of any coverage changes and to challenge those changes wherever possible, including by offering additional information. Broad coverage remains critical amid a challenging claims and regulatory environment, which leads to more avenues for potential claims.
As private companies grow, it is also important to consider purchasing higher limits and deciding the appropriate amount of dedicated Side A coverage. The latter can be particularly important to new board members as it offers personal asset protection when a company is unable to provide indemnity.
Whether a private company is in start-up mode, well-established, or seeking to tap into public markets, structuring the appropriate amount and breadth of coverage is a critical backstop to protect against an ever-growing range of risk factors.
Matthew McLellan is the US D&O product leader for Marsh’s Financial and Professional Liability Practice.