Rob Yellen, executive vice president, FINEX NA at Willis Towers Watson, agrees that competition within the D&O marketplace is particularly intense at the excess levels. “On larger programs, you can't hit [pricing] floors,” he says.

Yellen says he sees no reason to believe the market will become less competitive in the near future. Berberich explains why: “There's a reason capacity is coming into this space. It's been very good business over time, historically. The loss ratios have been pretty darn good, especially on Side A business.

“And so, it's an attractive market,” he adds, “until the losses start coming.”

Losses may be coming from a familiar place if securities class action filing figures from 2016's first half carry through to the end of the year: Cornerstone Research's Midyear Assessment shows 119 new federal class action securities filings for the first six months of the year, 32 more than 2015's first half and 27 percent above the 1997–2015 semiannual average of 94 filings. In a July blog post, Yellen wrote, “The data from the first half of 2016 suggests we can expect securities class actions to remain the predominant driver of D&O claim severity.”

“It's not a trend,” Yellen stresses. “It's too short of a period to say it's a trend. But it is concerning.”

Related: Leading writers in 11 P&C insurance markets

Security lawsuits have remained high, but the large losses aren't occuring as they have in the past. (Click image to enlarge.)

The claims picture

Although competition may be intensifying, some experts point out that the race for D&O premiums isn't wholly new. “Following the financial crisis, we obviously saw new markets capitalizing on the regulatory overhaul of the public marketplace,” says Ziad Kubursi, senior vice president, Management Liability and Financial Institutions at CNA. “A lot of markets jumped in and put up some capacity.”

Colin Daly, executive vice president of JLT Specialty USA, goes back even further. “We've been in a soft market for close to 10 years in some form or fashion,” he says, noting that while some industries within D&O saw hardening during the financial crisis, many stayed competitive. And it's just been downward since then.“How much further can it go, is the question,” he adds, “and I don't know the answer to that.”

There is some good news for D&O carriers: Other types of legal actions showed lessened activity through the first half of 2016. Derivative shareholder lawsuits fell 34 percent year over year to 60, while merger objection suits dropped 17 percent year over year to 87.

Even with increased securities class action activity, Berberich says carriers on the Excess side have been somewhat shielded. “If you look at the statistics,” he says, “the number of securities lawsuits has stayed high, and trending higher for 2016. But the jumbo losses just don't seem to be happening like they have in the past.”

Cornerstone's report notes dollar losses from mega-filings were notably smaller than historical averages, even while smaller class actions continued to increase.

“It's been a favorable claim environment in the last few years. Very few lawsuits get at those big Side A towers,” says Berberich. “So folks who write a lot of Side A business are reaping the benefits of low loss levels over the last few years.”

On the primary side, the picture is a bit different. Daly makes a point similar to Berberich's, noting the new claims landscape for D&O where there are fewer “big claims that will burn down a tower,” and instead more claims that are mostly captured in the primary and first excess layers of D&O programs.

As a result, he says the primary market has not seen softening to the degree Excess has. “We do see pockets of decreases here and there, but we also see pockets of increases,” Daly says of the primary market.

However, Michael Piccione, senior vice president of the Public D&O Division at Allied World, says he is just now seeing pricing in the primary space for existing accounts come under pressure. He says the pressure is driven by “a slowdown in D&O new business opportunities generated from IPOs, which are down 58 percent year-to-date; the impact of quarterly rate reductions in the high single digits on excess pricing; and aggressive targeting by new entrants.”

Figures cited by Sarah Downey, D&O product leader at Marsh, show deterioration on the primary side — not to the degree of declines for excess layers. She says Marsh clients are getting average rate decreases of 4.5 percent on primary layers in Q2, and decreases of 7.5 percent for total programs. She adds Q2 2016 marked the seventh consecutive quarter in which Marsh clients saw total program average rate decreases.

Piccione cautions some of the new carriers competing on price in the primary market: “Adoption of an aggressive primary strategy may backfire on some of the newer entrants … as many have not established a well-diversified portfolio of Excess and Side A to withstand the hits of writing primary.

“As such, insured buyers should be mindful of these risks when dealing with new entrants and take caution,” he adds.

Daly says buyers are wary of significantly aggressive carriers, questioning whether they want those particular carriers on their primary layer.

Bill Passannante, a shareholder at Anderson Kill (a law firm that represents policyholders), says a D&O claim that might be ordinary for an established carrier could “get handled oddly” by a new entrant with a claim department unfamiliar with the complicated nature of D&O risks.

Related: Fitch: D&O insurance rate declines show softness in P&C market

Carriers are responding to the increased regulatory scrutiny. (Click image to enlarge.)

Hardening competition, soft rates

New markets continue to show not only interest in D&O, but also a willingness to compete hard for it. “We've certainly seen increased competition for the business, both from the long-term players and from the new entrants that have come in the past few years that are trying to write more business,” says Shanda Davis, D&O product manager for Travelers.

Daly says some new entrants will offer “significant decreases on programs, and that can be in the primary, too.”

Regarding new entrants' aggressiveness, Kubursi says it's about cash-flow underwriting: “They're buying as much market share as they can when they can, with very little focus on what that means from a loss standpoint.” He notes that new entrants over the years have run the gamut, from mega-companies to foreign insurers looking to expand into the United States

Daly says longer-term carriers are “consistent on their pricing,” although Berberich says veteran markets are responding to new entrants by “flexing their muscles and being aggressive.” 

SEC investigations up

The intense competition and softening rate environment comes not only as securities class action activity appears to be picking up once again, but also as regulatory scrutiny of public companies continues at an elevated level — a continuation of the post-financial-crisis zeal among regulators.

Edward Kirk, a partner at Clyde & Co., a law firm that represents insurers, says the numbers of investigations and regulatory actions are up. Securities and Exchange Commission enforcement actions were up 7 percent in 2015, he says, to 807. The length of the investigations was up to 21 months on average.

“I think it's probably safe to say if the length of investigations increases like that, we'll probably see elevated costs and more exposure for D&O insurers from SEC investigations,” says Kirk.

Daly adds that Mary Jo White, chairman of the SEC, is also targeting smaller infractions and smaller companies. In general, he says, the SEC is “just much more active in chasing companies as well as individuals.”

The U.S. Department of Justice is getting into the act in a big way as well. Kirk and others point to the “Yates Memo,” released In September 2015, which calls for the Justice Department to focus more on holding corporate executives accountable rather than just the company itself.

In the memo, Deputy Attorney General Sally Quillian Yates writes, “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing. Such accountability is important for several reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public's confidence in our justice system.”

That increased regulatory scrutiny is not just impacting the potential loss landscape, but coverage demands as well — and in a competitive D&O market, carriers are responding.

“Companies are interested in coverage for regulatory investigations, and the market has responded with some carriers offering an endorsement to the primary D&O policy to provide coverage for an SEC investigation of a corporate entity when the company has a related securities claim,” Piccione says.

Kubursi says directors and officers now have a significant fear of being exposed personally and financially, leading to more demand for Side A coverage and for higher limits. He notes that CNA just came out with an enhanced form developed in part in response to the Yates Memo. The improved Side A policy provides two reinstatements, so if limits are exhausted on a Side A policy, he explains, they can be reinstated if there is another director or officer named in the case not directly tied to the same action.

Davis says Travelers has recently offered a new public D&O policy that provides affirmative coverage for certain nominal defendant expenses and claimant attorney fees that are awarded in non-monetary settlements in securities claims. She says Travelers and others also have solutions to give coverage for certain entity-investigation expenses.

Even outside the United States, the D&O market is seeing innovations. AIG UK announced an addition to its D&O policies that will cover costs not paid for by the company for legal challenges in the event of permanent residency applications being rejected pre-Brexit, and the subsequent challenges to repatriation orders post-Brexit.

In the private D&O market, George Schalick, vice president of the Management & Professional Liability Division of Philadelphia Insurance Cos., says opportunities are increasing. It has traditionally been a hard sell for D&O and Employment Practices Liability Insurance, he notes, but more buyers purchase the coverage every month now.

All told, the D&O market is a place where everyone seemingly wants to play, but because of that, what makes the market attractive is, to some degree, diluted. As Kubursi notes, expense ratios are up, commission expenses are up and cost of claims are up.

“All those increased costs on a very low pricing model, with much higher severity and frequency on losses — that's an imperfect market,” he adds.

Related: Infographic: The D&O market, at a glance