Supply & demand imbalance among forces pushing down D&O pricing
Are the middle market and private company D&O the keys to unlocking new opportunities in this sector?
In 2023’s first quarter, the average price per million for directors & officers (D&O) coverage declined nearly 25%, according to Aon. The data includes all limits purchased by publicly traded companies during the quarter.
This marks the fourth consecutive quarter with year-on-year price decreases and follows a four-year period that saw 17 quarterly price increases.
Around 80% of primary policy renewals with the same limit and deductible saw premiums drop during Q1 2023, marking the first quarterly decrease for an opening quarter in the past six years, Aon reported. Most (96%) of primary policies renewed for the same limits and 77% renewed with the same deductible.
Results from the past four quarters are a seismic shift from what the D&O market experienced in 2020 and 2021, when north of 90% of renewals were seeing pricing increases.
According to Timothy Fletcher, CEO Aon’s financial services group, an abundance of supply and a slowing in the number of deals due to economic conditions are two of the driving forces pushing prices down.
“In 2020 and 2021, you had new companies becoming public that were new entrants to the demand side of the equation,” Fletcher says. “You don’t have that right now because equity markets are what they are. There are certainly fewer new buyers and less premium in the system.”
Additionally, there are fewer large new businesses looking to buy, which is driving competition, according to David Payne, chief revenue officer at CAC Specialty. During the past two to four years, the market has seen some new carriers come in, which is also driving the competition in the marketplace.
“You hear about the IPO market kind of going away, the SPAC market kind of going away, and that drafts competition because folks are looking for revenue,” Payne says. “It’s the new entrants plus the existing carriers all chasing the same stuff.”
To this end, Marsh reports that some carriers are showing a willingness to take on more difficult-to-place lines, such as property and cyber, in order to secure layers on D&O contracts.
Appetites growing from middle market, private company D&O
Fletcher adds that incumbent carriers are showing an increasing appetite for D&O risks, and are looking to the middle market and private company D&O to uncover opportunities.
“A lot of insurers want to grow in the middle-market space and private company D&O because they think that is a place with long-term value and there is less volatility on the claims side,” Fletcher says.
Concerning private company D&O, carriers view writing coverage for those firms are a way to spread risk across their portfolios.
The middle market, Fletcher notes hasn’t been a major focal point for a majority of insurers in the past, with a few notable exceptions such as The Hartford.
“The big insurers cared about the big risks; Fortune 500 companies, and the rest of it has been more fragmented,” he says. “For insurers and brokers looking to where to go; well this a place that has been underserved over time.”
While carriers are signaling increased appetites that might change if pricing continues to drop.
“We are going to come up on a year of this rate environment really changing negative, so we’ll see what happens in the third and fourth quarter,” Payne says. Will the carriers pull back or will they keep the same momentum with those decreases? They all talk about not wanting to do that, but will they have the disciple to continue to give 10%-15%, on average, decreases.”
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