While concerns about a “tsunami of pandemic-related litigation” never quite materialized, according to Woodruff Sawyer in its latest D&O Looking Ahead Guide for 2023, those fears have been replaced with a number of others among D&O insurers.
Economic challenges such as inflation and higher interest rates, as well as the threat of a recession, combined with the war in Ukraine, limited supply chains and a volatile stock market are creating a difficult environment for management teams and boards.
In fact, Woodruff Sawyer found that the No. 1 thing on the minds of boards of directors as they planned for 2023 was the economy.
“Capital markets are off, inflation is worrying, and businesses everywhere are bracing for a serious recession,” the report said, adding that “carriers will look favorably on companies that demonstrate they are well positioned to address these macroeconomic realities as well as risk related to corporate governance.”
In its Looking Ahead report, Woodruff Sawyer surveyed 39 insurance carriers with whom it places D&O insurance around the world. The survey asked questions regarding the current risk environment, risk appetite and future pricing expectations. For the first time this year, the company also asked underwriters to share their thoughts on these questions. And it’s not all bad news.
“The results of our Underwriters Weigh In survey showed that fewer underwriters than last year believe that D&O risk is increasing,” the survey found.
In fact, Woodruff Sawyer found the first half of 2022 brought a dramatic shift to U.S. public company D&O insurance. According to company data, 70 percent of clients renewing between July and December 2021 received an increase in premium, while 18 percent of renewals came in flat and 12 percent resulted in a decrease.
Beginning in January of 2022, however, the trend flipped, with 16 percent of clients experiencing an increase, 15 percent obtaining a flat renewal and 69 percent obtaining a decrease. The shift was most dramatic for IPO, life science and technology companies, Woodruff Sawyer said in the report, adding that these were the companies hit hardest by the upward D&O insurance pricing trends of years past.
“In last year’s Looking Ahead, we predicted pricing relief was on the way, but the speed with which the market turned has been surprising,” the report said. “We expect this trend to persist into 2023.”
One reason for better pricing is that new insurers have entered the D&O marketplace. Renewed competition has caused some carriers to reduce premiums in order to retain clients.
“This has brought welcome competition to the D&O market across the board, including renewals for companies just one year out from an IPO,” the report said.
While some companies did still see an increase in their renewal premiums, the report found the severity of the increase continues to drop. At the time data was collected for the report in 2022, the median increase was just 8 percent, much lower than the past three years in which median increases were 31 percent in 2019, 38 percent in 2020 and 14 percent in 2021. Not all companies are seeing as big of a drop in their premiums, however, with mature public companies and lower risk profile companies experiencing less of a premium decrease.
Additionally, insurance carrier exposure to state court litigation for IPO companies has waned as companies have adopted federal forum provisions, which push IPO-related litigation back into federal court, the report said. Pricing for the first $10 million of insurance on a new IPO peaked in the first quarter of 2021 but has since moderated due to the changing litigation dynamic.
“Nevertheless, D&O insurance pricing for new public companies is still far more expensive than pricing for mature public company peers,” the report added.
In the last decade, securities class action filings peaked in 2019 as well, when a record 268 lawsuits were filed. In the last two years, the number of suits decreased to 210 in 2020 and 182 in 2021, with only 85 suits filed in the first half of 2022, the report said.
Challenges Still Ahead
That said, D&O insurance underwriters still have concerns, with most surveyed underwriters saying they believe D&O risk is increasing. This is demonstrated by the fact that, while securities class actions are trending downward, settlements have remained high.
In the first half of 2022, Woodruff Sawyer data showed 48 settlements for an aggregate total of $1.4 billion in payouts—much higher than the 10-year average. Another 476 cases remain to be settled, according to Woodruff Sawyer’s analysis.
“This matters because of the strong and positive correlation between the time it takes for a case to settle and settlement amounts—a problem for D&O insurance underwriters,” the report said, finding in its survey that 86 percent of underwriters think that companies are not as aware of the frequency, risk and cost of litigation as they should be.
With this in mind, underwriters are looking for companies to demonstrate resilience and strong corporate governance around cybersecurity, ESG, privacy oversight, climate change and financial health, the report found.
“The softening D&O insurance market is a welcome change,” said Carolyn Polikoff, national commercial lines practice leader at Woodruff Sawyer, in the report. “But not all is rosy in the D&O marketplace. Underwriters are concerned about macroeconomics, the war in Ukraine and a volatile stock market. …We expect the soft market and advantageous pricing will continue into 2023 due to factors such as more competition in the public D&O marketplace. Still, each company and each industry has their own unique challenges.”