Before taking on crypto risk, D&O rates need to harden: experts

The rise of cryptocurrencies (crypto) has opened up a new arena of directors' and officers' (D&O) exposure, but carriers are reluctant to expand their appetite until the space becomes more profitable, industry leaders have said.

The US D&O claims environment has increased in frequency and severity, outpacing rates for the better part of a decade, noted experts at the 2019 Professional Liability Underwriting Society (Plus) D&O Symposium in New York on 6-7 February.

In the past handful of years, the US D&O space has become even more litigious.

Securities class action (SCA) lawsuits have spiked significantly in the past two years. In a recent post on his D&O Diary blog, RT ProExec executive vice president Kevin LaCroix said there were 403 federal SCAs in 2018, and 412 in 2017. From 1999 to 2016, the average annual number of filings was 193.

The intensity of the claims environment has made some carriers reluctant to expand into new areas such as cryptocurrency.

Insurers have to be “honest and realistic” about what risk they can write amid high claims frequency, stated David Murray, financial lines head of product innovation at AIG, at a Plus cryptocurrency panel.

“There is a problem just with understanding the technology and understanding the risks it presents,” Murray explained.

“We really don’t have any claims history or loss history in this space because it is brand new,” he added, adding that while there have been some 2,000 initial coin offerings (ICO), there have been only a dozen or so SCAs within crypto.

Murray said companies would likely want to wait a few more years and see how things play out before diving into writing D&O cover for cryptocurrencies.

D&O underwriters writ large will have to adjust pricing before they can consider diversifying their appetite in areas such as crypto, noted Dan Fortin, senior vice president of executive and professional lines for Berkshire Hathaway Specialty Insurance, as part of a panel discussion about market challenges.

According to Fortin, one of the industry’s greatest pitfalls is that underwriters mimic others’ pricing “almost blindly”. 

“I challenge our underwriters to go in and kind of ignore the pricing that’s getting delivered to you, because otherwise you’re getting anchored to that pricing,” he said.  
 
“Come up with a rate based on the model based on your underwriting assumptions and then compare it to the rate.” 

The environment in which insurers take on greater losses for lower rate has to shift, agreed John Benedetto, president of Berkley Professional Liability.

“People are conditioned to ask for something, for a decrease, and getting it,” Benedetto stated. “And the market is now pushing back and saying it’s just not sustainable.”