Insurance professionals working in the directors and officers (D&O) market report that its current hardening is unlike anything they've seen in decades. For years, they say, D&O was considered a relatively inexpensive coverage with breezy underwriting requirements. But now, premiums are up, and coverage limits are tightening. "We really haven't gotten into a position where the pricing is where it's ultimately going to be," said Mike Smith, president and CEO of Axis Insurance Services, LLC. Smith was one of three panelists who discussed D&O hard-market trends during a September webinar hosted by the Wholesale & Specialty Insurance Association (WSIA) U40 group for rising industry professionals. "It's a very different environment than it used to be," Smith continued. "In most cases, as a broker, we're seeing sticker shock across the board." He outlined several trends, which are illustrated above, behind recent hardening in the D&O market — a robust sector that sits over professional and management liability insurance products. That family of policies also includes employment practices liability insurance (EPLI), cyber liability, representation & warranty policies, legal professional liability and medical professional liability. D&O policies cover individual executive board members and are distinct to public companies, private companies and nonprofits. "We're in the third year of a positive rate environment," confirmed Brian Zink, senior vice president and head of management liability at Zurich North America. He added that all of the management liability products are "behaving badly at the same time with increased frequency and severity." As a primary carrier, Zurich is monitoring D&O market hardening both domestically and internationally. The last time Zink recalled monitoring a similarly tough management-liability insurance market was in the early 2000s when companies and organizations weathered a recession. The Insurance Information Institute reports that the most common types of claims to trigger D&O coverage include (but are not limited to) shareholder lawsuits over company or stock performance; creditor or investor lawsuits over mismanagement of fiduciary duties; prospectus misrepresentation; and failure to comply with the law. |

Rewind a few years

Carriers quaked as the #MeToo movement rose to prominence alongside the broader call for more diversity at all levels of a company or organization. While there were some sizable settlements to result from that period — notably the $90 million judgment against 21st Century Fox in 2017 over sexual harassment — this particular class of lawsuits has become less menacing than insurers originally feared they would be. Some insurance experts believe that the less than expected impact of #MeToo and diversity claims may help the D&O market to stabilize. But social inflation still looms large. "Social inflation is a bunch of things all rolled into one," Javier Gonzalez, executive vice president of sales for PL Risk Advisors, Inc., said during the WSIA webinar. Among those things, it is "the current environment where the public, in general, expects companies to be good corporate citizens." Gonzalez added that thousands of lawsuits and subsequent liability claims have been spawned by this cultural push. Tricia Melly, head of professional claims at AXA XL, said in a recent interview that as far as claims executives are concerned, a hard market can be beneficial. "Policy terms can be a little less giving, and that impacts us on the claims side," she said. Any D&O or management liability claims, therefore, become "an easier conversation." Another driver of higher rates on professional and management liability insurance in the last five years has been the uptick in mergers and acquisitions. Any objection to the terms of these deals can result in a lawsuit. "The more complex the transactions, the more attorneys will get involved," Paul Bunone with AmTrust Exec, a managing general agency focused on the marketing and underwriting of management liability products, said during the WSIA webinar. "There's obviously a higher opportunity for an error to occur, or for somebody to be upset" and trigger a lawsuit, he said. There are more active professional and management liability insurance policies now than when Bunone began his career in the mid-1980s; however, underwriting has become markedly more complicated. Gone are the days when financial condition was one of the only considerations underwriters looked at when approving these policies. "There are far more factors involved" in underwriting now, said Bunone, a principal with AmTrust Exec. Some of the issues underwriters must now consider include stock market conditions, a company's board makeup and debt projections. Specifically, with regards to mergers and acquisitions in general and special purpose acquisition companies (SPACs) in particular, Melly said claims tend to go more smoothly when brokers and underwriters practice due diligence on the front end of the policy or tower. "Brokers really need to understand what the transaction is, what that company looks like today, and what it's going to look like tomorrow," she said. "They really need to take a deep dive and think through who the [policyholders] are, what hat they wear at the company, and where that exposure should go." Complicating matters even more is the growing popularity of forming SPACs for the express purpose of facilitating mergers. More than half of the mergers in 2020 involved a SPAC, according to Risk Placement Services (RPS), an excess and surplus wholesale broker and managing general agency. This trend has implications ranging from securities law to increased underwriter scrutiny, said Manny Cho, RPS executive vice president. "I have no doubt that plaintiff's firms are laser-focused on this space," Rodney Choo, senior vice president of executive lines at RPS said in the firm's 2021 Management and Professional Liability Market Outlook report. Muddying the waters even more are issues specific to whether the insured is a public or private company. Cho said professional-liability underwriting was already getting more complex before the global pandemic, but the international crisis "pushed it even further." "I've had more bankruptcy and credit exclusions added in the last year than in the prior eight years combined," added RPS Executive Lines Producer Bryan Dobes in the firm's 2021 market update. "Insureds are in a position financially where they're frankly not sure if they're going to be around in a year." On the EPLI side, underwriters used to simply look at a company's number of employees and whether or not there was an employee handbook. Now underwriters also conduct an analysis of a company's past claims as well as how those exposures are currently managed. See also: Understanding & writing D&O policies for SPACs |

Crystal ball forecast

Although professional liability insurance was largely insulated from financial fallout from the pandemic, now, personnel issues could begin to play out in this market. "We're starting to hear rumblings about class action attorneys forming classes to say that people were wrongfully terminated," Cho said during a chat with NU Property & Casualty magazine. "They'll probably have more of a case in terms of when companies reopen and how they bring employees back." Discrimination lawsuits also may arise, Cho said. Bunone agreed that the COVID-19 fallout could begin to hit this market. Specifically, companies that saw their revenues seriously affected by the pandemic could also see more lawsuits and claims related to that impact. "That will have to do with how seriously revenues were impacted, whether they had to completely shut down or the potential increase in bankruptcies," he said. The service and hospitality industries may be especially vulnerable in this regard. Should employees continue to work remotely, he adds, cyber liability also could have a more pronounced role to play. And of course: The state of the economy and the stock market in the coming months will have a direct impact on the professional liability insurance market. "From the looks of things, carriers are reserving for" post-pandemic lawsuits, Cho said. "Reinsurance also will have an impact on what carriers are able to do in the future," he added. "We still need price and rate in a lot of parts of the market, so it's a weird balance right now. We're probably going to have a shrinking of insurance, but you need to get more money to make up for the losses of the past." The situation may require a year or two to settle down. Melly said that regulators also might have a bigger role to play in the future. "With the [U.S. Securities and Exchange Commission] being more active under [President Joe Biden], they're already taking a hard look at SPACs, and I think they'll continue to do so," she said. "That will be something to watch" because SPAC scrutiny could produce more claims. See also: |

• D&O insurance market tightening, SPACs feel squeeze
• 5 D&O insurance priorities to keep in mind during 2021
• A hard D&O market has new meaning in the COVID-19 era