What’s going on with D&O pricing for 2021?
For the past two years, both private and public companies, purchasing D&O insurance have seen a disruption in their typical renewal process.
Prior to 2019 most D&O renewals went smoothly. There was competition in the insurance marketplace for new and renewal business, prices were competitive to stable, and renewal terms were fairly consistent from year to year for about the entire decade before 2019.
Then things changed.
Why did they change? What happened to cause the D&O marketplace to turn the renewal process into a bit of a nightmare? There are several key issues that led up to that which we’ll explain.
First, let’s cover some basics.
Most commercial insurance buyers who have been around have probably experienced a change in the insurance market cycle. Property-casualty insurance, including D&O, will move in cycles from a soft market to a hard market.
Soft market conditions are characterized by competitive pricing, stable rates, and relatively easy underwriting.
Hard market conditions on the other hand have a trend of firming rates, higher premiums, and more restrictive underwriting practices.
In 2019 the D&O landscape changed pretty quickly into a hard market. Premiums rose, underwriting became more difficult, coverage forms had restrictions added to it, and overall the market was just plain difficult. That continued and grew more difficult into 2020, and 2021 doesn’t look like we’ll see any relief.
Certain classes of business were more impacted on rate increases than others, but most businesses saw annual increases in the 15 to 25 percent range, with tech and life science firms seeing increases of 25 to 50 percent or more each of the prior two years.
In our experience, no sector saw a decrease in renewal pricing since 2019.
This has caused some clients to reduce the limits of coverage, increase their retentions, or both, in order to afford coverage, and 2021 will continue to present challenges.
Why did D&O pricing 2021 shift?
There are several reasons, but generally speaking, it’s due to claim activity which reached its peak in 2019 after a ten-year stretch of rate suppression. D&O rates barely moved during the decade prior to this shift. Then three major things happened.
- The number of securities class action suits hit an all-time high. (frequency)
- All D&O related claim settlements reached all-time high levels (severity)
- Derivative action claims continue to rise.
Now you may be saying: “these are all public company issues, aren’t they?” And, you’d be mostly correct, but private company D&O taps into the same bucket of capital as public company D&O, so private firms will follow the pricing of their public company cousins.
Larger D&O buyers who assemble big towers of protection have seen not only their primary layers increase in premium but probably have seen their excess layers increase even more dramatically. D&O pricing for 2021 will continue this trend.
This has been due to the severity of claims penetrating to those excess limits, which we did not see that frequently in the past. It has become clear to D&O underwriters that excess layers were priced way too thinly in the past.
The ten-year average D&O settlement averaged just over $8 million; but in 2019 that blew up to almost $14 million, putting higher excess limits into play that beforehand had infrequently experienced losses.
This of course puts pricing pressure on lower and higher limits within a coverage program.
We’re also seeing underwriters retreat a portion of their capacity for a single client. Insurers who once would put up limits of $10 million in a single program are now cutting back significantly by 50 percent or more. This of course puts us, as brokers, in a difficult position to remarket a portion of a program vacated by a major underwriter. In most cases, we are seeing significant price increases when replacing coverage.
And, with all the disruption in the market, no fresh capital has entered the market with an innovative or fresh approach to pricing or underwriting which indicates to us that this hard market may last for several years.
So, what’s the solution?
Regardless of whether you’re a private or public firm renewals cannot be approached as business as usual. 2021 will be yet another challenging year for D&O (as well the other property-casualty insurance policies in your coverage program)
There are two key issues to consider.
- Start your renewal process early – meaning at least 120 days out from the renewal and
- Communicate with your broker, your underwriters, and your stakeholders.
Communicating internally from the start that the renewal will pose challenges is important. What’s most important to your directors? What initiatives are on the horizon? What issues could present an above-average risk during the year?
Keep in mind that D&O protects your directors, officers, and other decision-makers ‘ personal net worth, so having them engaged in the conversation early is critical.
- Will your firm be able to accept a premium increase?
- Can you afford to increase the retention on your program?
- Do you wish to see higher limits this year?
- Is adding dedicated Side-A protection a good idea this year?
These are all questions you should be discussing with your broker early on in the process so they can go to the marketplace armed with your wish list and desired targets.
Right now, we’re seeing underwriters reluctant to open their renewal underwriting file much earlier than 45 days before the renewal. This is difficult for us as brokers as it is for insureds, but we are pushing back on underwriters to engage early so it doesn’t come down to the wire. I suggest that you do the same.
One element of a successful renewal is complete information. Get your renewal applications done early and be thorough. It’s very frustrating for your broker and their underwriters to get incomplete renewal applications and attachments. This only slows down the process and puts your renewal submission at the bottom of the pile.
Another helpful technique is to engage in underwriting calls with one or more underwriters who are interested in looking at your renewal. This can be very helpful to distill questions and answers around specific issues your company is facing pre-renewal. It’s also an opportunity for your management team to highlight your company strengths and respond directly to your weaknesses. In fact, identifying those weaknesses well before the call and giving yourself time to strategize a response to them only will add strength to your renewal strategy.
To wrap up 2021 is going to be a rough time for D&O as well as the rest of your property-casualty renewals. Being prepared, starting early, and fully communicating with your broker are key to successful outcomes.
Have specific D&O issues you feel aren’t being addressed properly?
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