The D&O Insurance Pricing Rollercoaster: What Happens Next, and How Should You Prepare?

Although Directors & Officers (D&O) Liability claims tend to be less frequent than General Liability claims, when they do arise, they can be severe. While you hope you never have to collect against your D&O insurance policy, it’s a coverage you can’t afford to forego if your company has officers, directors, managers, committee members, or other parties, depending on your organizational structure. And as organizations of all types and sizes have seen, the rates have been on a wild rollercoaster ride over the past few years. 

Here’s a look at how the D&O insurance pricing landscape has changed, what we expect to happen next, and how you can position your organization for the best rates in the future. 

A Whiplash Change in the D&O Market

D&O insurance protects both your company as an entity and your directors and officers as individuals against claims of actual or alleged wrongdoing in managing the company, through an error, omission, neglect, or breach of duty. The policy covers the legal fees associated with defending against a claim, along with the resulting settlement or award.  

Much like real estate, every type of insurance—including D&O—goes through hard and soft market cycles. Hard markets are characterized by limited competition among carriers, which results in less capacity, more restrictive coverage, and higher rates. In soft markets, more carriers are vying for business, leading to more capacity, more expansive coverage, and lower rates. 

From 2019 through the second half of 2021, a hard D&O market left both nonprofits and for-profit businesses facing very high rates and coverage restrictions, even if they had no history of claims or lawsuits and were willing to increase their retentions. Then around mid-2022, the D&O insurance market flipped suddenly and dramatically, primarily as a result of three significant shifts:

• An influx of new entrants into the D&O market, driving up the supply of carrier capacity
• A drop in the number of IPOs (initial public offerings) and SPACs (special purpose acquisition companies), reducing demand for the coverage
• A reduction in merger objection and insider trading lawsuits, reducing the number of claims filed
  

With little warning, carriers began fighting fiercely for D&O business, offering greatly reduced rates to new clients and any profitable accounts they hoped to renew. In turn, brokers like B. F. Saul Insurance were able to market D&O accounts aggressively to obtain the most competitive coverage, retention, and premium for each client.

What’s Next for D&O Insurance Rates?

Without a crystal ball, it’s difficult to say when the D&O insurance market will harden again, whether the shift will be sudden or gradual, and how long that market cycle will last. The one thing we do know for sure is that the D&O market won’t stay soft forever.   

Current economic pressures are likely to trigger an increase in D&O coverage claims in the coming years for two reasons:

• Tight economic conditions tend to lead to a rise in bankruptcy filings, which in turn leads to more D&O claims alleging breach of fiduciary duty.
• If high inflation and rising interest rates depress the earnings of publicly traded companies and their share prices drop significantly, there is likely to be an uptick in securities class action lawsuits alleging the officers’ or directors’ actions directly contributed to the reduction in shareholder value.

On the other hand, many underwriters are no longer subject to strict underwriting guidelines pertaining to COVID. When COVID struck, carriers and underwriters faced sudden and intense underwriting restrictions due to the uncertainty of the impact that COVID would have on businesses. Now, carriers have more flexibility and may resume writing certain classes of business.

Know What Drives the Price of D&O Insurance

No matter the state of the D&O landscape, it’s important to understand which factors impact your rates—some of which are out of your control and others which you can influence.

• Industry. For example, D&O pricing is relatively high for real estate businesses in some areas of the country.
• Stage of maturity. Since young, less established companies have less historical data for underwriters to evaluate—and less experience developing a governance framework—they’re likely to see higher rates than more mature organizations.
• Financial health. A more financially sound company is in a better position to cover its retentions and weather the storms of a D&O claim, especially a side B claim that places the corporate assets at risk. On the other hand, underwriters recognize that some types of businesses will naturally carry more debt than others, and that will impact the rates they apply.
• Company size. Your total revenues and assets factor into your D&O rates, and a significant change in either direction will affect your rates at renewal. Even in a soft market, a company that experiences substantial growth during the policy period will most likely see its D&O premiums rise simply due to the increase in exposure.
• Claim and litigation history. As with any type of coverage, underwriters will review your D&O claim history, the length of time it took to settle those claims, and the total settlement amounts when determining your rates. If any of those claims resulted in lawsuits, that fact alone will drive up your rates, regardless of the outcome. And of course, a large award will increase your rates even more.
• Geographic scope. Companies that operate primarily in the US will face lower D&O risks than organizations which conduct business across borders. If you operate facilities internationally or sell to customers globally, you can expect to pay higher D&O rates than a similar organization that only operates domestically.

Obtaining the Best D&O Insurance Pricing

Given the dynamic state of the D&O insurance market, how can your nonprofit or for-profit organization obtain the best coverage at the best price? Teaming up with an independent insurance broker is an important first step.

With decades of D&O experience, B. F. Saul Insurance advisors keep our finger on the pulse of the insurance industry overall and the D&O market specifically, monitoring the changing landscape so we can best protect our clients. When market conditions are volatile, we work closely with you well ahead of your renewal to get coverage bound and rates locked in early. We also engage with underwriters we’ve established relationships with—both the incumbent and others—to market your company aggressively to obtain the best combination of rate, coverage, and retention. 

It also pays to take proactive steps to mitigate your D&O risk and make your organization as attractive as possible to carriers. Best practices like the following can reduce your D&O risks and improve your rates:

• Develop an appropriate governance framework and ensure all directors and officers adhere to it.
• Keep current on emerging risks, especially in rapidly changing areas like cybersecurity.
• Provide board members with plenty of notice of board meetings to ensure they attend and are prepared.
• Maintain good documentation of the due diligence you conduct on key decisions.
• Require all officers and directors to keep thorough, organized records.
• Maintain open communication between your executive team and your legal team, including in-house counsel and external attorneys.