All material subject to strictly enforced copyright laws. © 2021 Insurance Insider is part of Euromoney Institutional Investor PLC.
Accessibility | Terms & Conditions | Privacy Policy | Modern Slavery Act | Cookies | Subscription Terms & Conditions

US D&O risks face capacity crunch as losses spook underwriters

Higher loss experience and increasing levels of litigation have led to restricted capacity for US directors' and officers' (D&O) risks.

Sources told this publication that London carriers were now increasing retentions and putting down smaller lines after a number of markets had their fingers burned. As a result, there has been a small uptick in rates, they said.

US rates are up in the single digits on average, sources said, with loss-hit risks renewing substantially higher.

"Anything with US exposure has seen heavier increases in rate and reduction in capacity. I was out with a broking team recently who said $200mn-$300mn programmes were now harder to fill," said one source.

"People who [previously] put down lines of $25mn are now only putting down $10mn-$15mn."

Another underwriter said brokers were willing to accept lines of $5mn to get programmes home.

A US-based broker echoed this sentiment and said if a client wanted $300mn of D&O cover, he would typically only be able to source $250mn of capacity.

If the full $300mn can be found, the last $50mn is "really overpriced", the broker added.

For companies with less than $1bn in sales, the broker said: "We've definitely seen an upward pressure on retentions."

One London underwriter noted that US D&O towers that used to have a retention of $250,000 were now back up to the $1mn mark.

Sources pointed to a significant rise in the number of US federal securities class-action suits as a driver behind the increased loss experience.

The merger-objection suit has become a cottage industry for a new breed of class-action lawyers, and these are generally lawsuits that settle for $1mn to $1.5mn. This has a particular impact on the primary D&O market.

The US pharmaceuticals sector has become a focal point for these federal securities class-action suits. In 2017, 26 percent of all federal class-action filings were directed at healthcare and/or pharmaceutical companies. As a result, underwriters are becoming increasingly wary.

"No one is touching US pharma anymore," one London-based D&O source said.

Sources pointed to Israeli pharmaceuticals giant Teva, which is dual listed in New York and Tel Aviv and currently has $600mn of D&O limit placed in London. The firm's insurers have previously sustained losses related to governance failures in Mexico, Ukraine and Russia and sources speculated that it would be able to secure around half of that limit at best in the current market.

Meanwhile, recent high-profile, event-driven lawsuits relating to misconduct have added further uncertainty to the D&O risk landscape.

Sources cited the shareholder lawsuit filed against the Wynn Resorts board after sexual misconduct allegations surfaced against ex-CEO Steve Wynn, and the $90mn settlement 21st Century Fox was required to pay out after a sexual harassment scandal at its Fox News Channel.

"We've seen an uptick in claims [relating to this type of exposure]," one US broker said.

The view of the London D&O market from US brokers is that it is still not that robust, although it has improved over the last five years.

The Europeans have been more comfortable underwriting risks and their rates have been low, although they have undergone some adverse development, sources said.

London sources said the mood in D&O circles had "notably changed" from 18 months ago. A number of carriers sought to pile into the class a few years ago, but bad losses from Australia as well as the US have made people rethink their D&O strategy.

"The general mood is pretty bad, people realise this is a volatile class now, especially given the premium base isn't very large," said one underwriter.

As a result, rates are said to be up everywhere except Europe, where prices are thought to be flat to down single digits.

In general, primary layers are achieving rate increases, but insurers on excess layers are now also pushing back when asked for reductions by brokers. In some extreme areas this is resulting in business leaving London, sources said.

This is particularly true of Australia, where underwriters believe primary rates have now peaked.

Rate increases of around 45-50 percent were described as pretty normal, but rates on some outlying accounts were up as much as 300-400 percent, sources said.

London underwriters are "not willing to budge" on Australian D&O pricing, they added.

However, terms and conditions in the wider D&O market are still loose, with the exception of Latin America, where corruption cases such as the Petrobras affair led to tightened wordings, sources said.


We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree