Tag Archives: Directors & Officers

Evolving market conditions may lead to increases in D&O coverage rates

Securities action lawsuits, prevailing social issues like the #MeToo movement, and evolving cyber security risks are trends that have increased the demand for directors and officers (D&O) insurance coverage and overall costs to insurers. As a result, insurers are calling for higher coverage rates.

Many insurers believe risks are increasing without any signs of slowing, indicating 2019 may be the first of many years insureds will face unexpected D&O insurance rate hikes. For more perspective on the changing landscape of D&O insurance, read Rachel Soich’s article “Three rising trends in D&O insurance.”

Shifting grounds of D&O liability

Darren SondermanFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insight.

Enterprise risk management (ERM) constantly tries to look ahead and forecast the future. For example, what do cyber risks mean for directors and officers (D&O) liability policies? It’s possible that the new cyber risks we have been seeing in recent years reflect greater systemic risks, which could be the primary issue. This makes it harder to project how cyber risks will affect D&O policies.

The pace in which claims are settled adds uncertainty. It can take three or four years before actual dollars are paid out on D&O claims. In comparison, cyber-related cases may be paid out in three to four months because those losses are immediately recognized by insurers. These two cycles are seriously out of sync. How do they affect D&O coverage?

As more and more companies acquire insurance against cyber risks – given what we see in the risk environment – it’s possible the market is mispricing the risk, and we may see a snowballing of insured losses. These complexities are certainly something for ERM programs to look at and think about.

For ERM programs to be successful, they need to skate to where the puck will be, not where it is. At the moment, I think we all believe that the market cycles are probably not going to get any softer. Something is going to occur that will probably create a hardening of the market. In terms of D&O coverage, it may indicate that now is the time to consider preparing for the upcoming changes. Insurance companies may need to think about more effective or aggressive means of underwriting. Every situation is different for every industry, but most companies have a sense of the market rhythms they live by.

When we think back to the global financial crisis, specifically the subprime meltdown between 2007 and 2009, there was a very hard market. Enhanced underwriting tools would have been useful because there were underwriters who could differentiate more moderate risk profiles from greater risk profiles. In the near future, it’s likely that these tools will become more useful for D&O policies. Nonetheless, now is the time to implement them– while the market is still soft. It may be too late once the market hardens again. It may take perseverance and some cycles to work in, but organizations end up with people who are finding ways to check boxes and get signoffs and are comfortable working in tougher underwriting environments. If an effective quantification of the ERM value is something that an underwriter can use to demonstrate heightened diligence, it will be useful in all market cycles – especially a hard market.

Darren Sonderman is an EVP at McGriff, Seibels & Williams, Inc. and co-founder of the company’s Financial Services Division, which specializes in the implementation, innovation and execution of Management Liability insurance programs. In the fall of 2015, Darren co-hosted a panel discussion on D&O insurance at the Milliman Risk Institute Advisory Board Meeting. As part of this blog series, we invited Dan provide some additional commentary on D&O programs and ERM.





D&O insurance is a key component of an ERM program

Dan Bailey_MSWFounded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.

In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insight.

If I were to pick a single area of enterprise risk management (ERM) to focus on now, I would look at the regulatory world, especially directors and officers (D&O) exposures. Government authorities have changed their focus to hold public sector executives accountable.

For example, both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) recently announced initiatives to more frequently investigate and prosecute civil and criminal charges against the “gate keepers” within public companies. The stated intent of these initiatives is to improve corporate behavior. Those types of claims are uniquely problematic for directors and officers because they are difficult to resolve and threaten both the livelihood and freedom of the targeted executive. Plus, their company may be unwilling or legally unable to indemnify them for their losses in those claims.

As a result, quality D&O insurance coverage is more important today than ever before. D&O insurance policies have become somewhat of a commodity in recent years. There is a lot of competition. If a carrier doesn’t write a policy at a certain rate or with certain terms, customers often leave that carrier and go to a competitor. As a result, it is critically important that directors and officers (through their advisors) identify their preferred coverage terms, which may differ depending on whether those involved are directors or officers. Officers are much more likely than directors to be targets of allegations of egregious wrongdoing, such as fraud or willful violations of law. Consequently, officers want broad coverage for these allegations, subject to a final adjudication that the officer actually committed the egregious wrongdoing. On the other hand, directors (who very rarely are alleged to have committed such egregious wrongdoing) may be more concerned with preserving the insurance policy’s limits of liability for their own benefit than affording broad coverage for alleged egregious wrongdoing by officers. How an insurance program is structured to address these competing concerns frequently depends on who makes the insurance purchasing decisions (i.e., the officers with little or no input from the directors or the officers with considerable input from the directors and their independent advisors).

D&O insurance strategies are part of a company’s overall ERM program. With ERM, we’re not talking about eliminating risk. Risk can be good. What we’re talking about is aligning reasonable risks with corporate strategy. In the D&O insurance context, that means identifying who within the company should be covered to what degree and for what exposures. The existence or lack of certain coverages for a person can affect that person’s behavior, so the structure and terms of a D&O insurance program should be carefully considered from the viewpoint of different insured persons. And directors – not just officers – should have input into those decisions.

Dan Bailey, Esq., chairs the Directors & Officers Liability Practice Group at Bailey Cavalieri LLC. As a nationally recognized expert regarding D&O responsibilities, liabilities, indemnification, insurance, and loss prevention, Dan represents and consults with directors and officers, corporations, insurance companies, and law firms across the country. In October 2015, Dan presented at the Milliman Risk Institute Advisory Board Meeting as a keynote speaker. His remarks were well-received and followed by a robust Q&A session. As part of this blog series, we invited Dan to provide some additional commentary to his speech and share his views on trending topics in ERM.