Capacity Plentiful, Pricing Remains Soft in D&O Marketplace
The directors and officers liability insurance marketplace continues to be a buyer’s market – with new entrants contributing to the plentiful capacity, competitive pricing and expanded terms, according to industry participants who spoke with Insurance Journal in February at the Professional Liability Underwriting Society (PLUS) D&O Liability Symposium in New York.
“For a period of time, over the last number of years, the number of players in the professional liability space has clearly grown. As a consequence of this, with basic laws of supply and demand, the terms have expanded. Pricing remains soft,” said James Skarzynski, current president of PLUS and chairman at law firm Skarzynski Black LLC who specializes in D&O and other forms of professional liability coverages.
Of course, the drum beat of the claims continues on, said Skarzynski.
“To give one example, the definition of claim – which has taken on a lot of relevance – while simplifying somewhat historically, a claim used to be defined as a lawsuit, or a written demand for money, or damages,” he said. “Now the definition of claim, again, simplifying somewhat, has been greatly expanded, such that insureds were arguing for coverage for SEC investigations, grand jury proceedings, internal investigations.”
In the past, the insurers reacted negatively to those efforts by the policyholders to expand the coverage, saying that the wording did not cover these claims, said Skarzynski.
But he said in more recent times, as a consequence of the amount of capacity in the marketplace – as well as some developments in the case law – a number of large players in the market have expanded the coverage in their forms to give much broader coverage within the scope of what is a claim, clearly covering investigations to some extent.
Another trend that’s happened over the past few years is the skyrocketing cost of governmental investigations. “It is not unusual for fees in connection with the governmental investigation under a D&O policy to exceed $10 million and get into eight figures, which is a number significantly higher than what a complex security case might have cost the defense, say 10 years ago,” said Skarzynski. “That has certainly been a large development, a significant development over the last number of years.”
Todd Greeley, head of claims for the Executive and Professional Lines Product at Berkshire Hathaway Specialty Insurance, a relatively new player in the marketplace, agreed that in the commercial D&O market, there is a tremendous amount of capacity, particularly for excess placements.
“That, of course, has an effect on the supply-and-demand equation, so pricing is definitely reflecting the fact that there’s probably more capacity than is needed,” said Greeley.
“The biggest issue is definitely the capacity in the marketplace, and the impact that has on pricing especially when you get to the excess layers. Not as pronounced when you’re talking about D&O for financial institutions, but even there, there’s a fair amount of capacity in the marketplace.”
Entity Coverage
Greeley also said the cover for entities when they’re investigated is probably one area that’s being pushed in terms of trying to expand the scope of coverage in the D&O form.
“There are several things you can get in the marketplace that provide some form of cover when the entity is a subject of an investigation, typically the D&O form – the D&O policy’s going to cover individuals when they’re subject to a formal investigation,” said Greeley. “There’s been a lot of evolution in that in the main D&O forms today you can get some coverage for what I would call an informal investigation of individuals. It’s going to vary by carrier.”
There is also some additional erosion in terms of limiting existing exclusions in D&O policies, he said. “You’re seeing efforts to broaden the notice provisions of the policy so that it’s less likely a customer will be tripped up on a technicality on a claim.”
The marketplace’s abundant capacity was also mentioned by Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty LLC and an insurance intermediary focused on management liability issues.
“It is a marketplace that’s characterized by abundant capacity. Every buyer is going to find someone that will write them. There are new entrants. There are entrants that have been not as significant players that are seeking to expand their capacity. As a result, there’s a great deal of insurance capacity available,” said LaCroix.
Just the basic law of supply and demand means that that’s going to be a favorable environment for buyers because the supply is abundant, he said.
“The exception is going to be companies that are financially troubled, companies in certain specific risk classes,” said LaCroix. “I would say biotech companies, companies in legally complicated industries like gambling, or firearms manufacturing … those are always going to be difficult placements,” he said. But other than those types of companies, the vast majority of buyers will have abundant supply, and will be able to find attractive terms and conditions in the D&O market, says LaCroix.
Product Differentiation
In such a competitive environment, it’s not easy to differentiate one’s product, according to Dan Fortin, senior vice president of Executive & Professional Lines at Berkshire Hathaway Specialty Insurance.
“On one hand, there are challenges from a risk and exposure perspective. But on the other hand, there is a ton of available capacity out there, a lot of D&O insurers – probably at an all-time high in terms of the amount of capacity out there, not only in the U.S., but globally,” said Fortin.
“I see a lot of healthy capacity, some pretty good underwriters in the marketplace. There are pockets of irresponsibility, I am sure everyone has a story here,” said Fortin.
“By and large, I think the market’s disciplined. So I think underwriters are going to have to dig deeper in 2015 to figure out ways to compete and win business other than just with the typical weapon of choice, which is price.”
“And so, the underwriters need to figure out a way to differentiate themselves. It starts with understanding the needs of the client, understanding the needs of the broker, what they want to accomplish, and then how can you help them do that? The days are gone that you rolled out a D&O product or a D&O policy and you said, ‘Here it is. Take it or leave it.'”
“You need to be able to customize, have the flexibility and the expertise to really understand what’s unique for that risk in order to adjust the contract,” Fortin advised. “From a buyer’s perspective and broker’s perspective, there’s a lot of options out there. It’s a lot of opportunity to really put together a D&O program for the long run.”
Fortin, who began his career in underwriting in 1991, said the weapon of choice for most underwriters has been price, but, he added, “as somebody who has been in the business for as long as I have, I understand where that usually leads, and it doesn’t end well for most underwriters.”
“You need to find a way, first of all, by understanding the fit with the client. What does the client value? Then sizing that up and putting a product out there.”
Most clients value financial strength, Fortin noted, and increasingly, brokers have become sophisticated in understanding the service that underwriters are providing, the flexibility of coverage, the responsiveness in issues of policies, and just simply underwriters getting back to them on a timely basis and being responsible, flexible, and professional.
“But I think, increasingly, maybe most importantly, is the claims organization,” said Fortin.
“There is not a meeting that goes by with a broker, a client, or a prospective client where they don’t ask about how we are handling claims,” he said. “What are we seeing first of all, but how are we handling them? Do we have that expertise in-house? Because that’s a capability that you really have to think twice about outsourcing.”
A video interview of Dan Fortin, senior vice president of Executive & Professional Lines at Berkshire Hathaway Specialty Insurance.