What to Expect in D&O Insurance in 2017: Marsh

February 1, 2017

Directors and officers liability policies are likely become broader and continue getting cheaper in 2017 – among the likely trends expected for the financial and professional liability insurance marketplace in the months ahead, insurance broker Marsh said in a new report.

Marsh said that public D&O liability insurance rates will keep dropping in 2017, following nine continuous quarters of rate decreases. But the rate of decline should slow somewhat, despite a spike in federal filings, according to the report.

There was a notable spike in federal filings in 2016 – the most since 2002 — however, “the impact from those claims will take months, perhaps years, to be reflected in insurance rates,” Marsh points out.

As price declines continue, however, the market is seeing a related trend: pure individual D&O coverage policies are fading away, with insurers focusing on broadening their D&O offerings and making them unique in order to stay competitive, marsh said.

Among the ways insurers are trying to keep their D&O offerings unique: either providing or improving entity investigation cost coverage, adding reinstatement of limits for full coverage, and continuing increases in excess derivative investigative cost sublimits. Marsh said that excess insurers are also reimbursing an insured a percentage of their retention, if able to successfully obtain an early securities class action dismissal with prejudice.

Marsh other trends it expects for the sector in 2017:

  • Securities regulations and corresponding enforcement/claims changes with a President Donald Trump and Republican-controlled Congress. Changes will include deregulation for financial institutions and other organizations, with potentially fewer corporate penalties even as “culpable individuals” are held accountable. One risk: deregulation could lead to more claims due to less transparency and “mandate corporate guidelines.”
  • More shareholder activism. This could breed more litigation and more global regulatory activity.
  • Andrew Puzder, CEO of CKE Holdings (the owner of Hardee’s and Carl’s Jr.) is nominated as the new head of the U.S. Department of Labor. Marsh said that if he is confirmed, his policies could impact “the frequency and severity of employment, wage and hour, and fiduciary liability litigation.” He has been a frequent critic of federal policies in all areas, including plans to expand overtime protection.
  • More M&A is likely, along with other corporate arrangements. Marsh said that the M&A trend will continue in 2017, which could fuel interest in representations and warranties insurance, in part, to help make sure the deal closes. But Marsh said companies will also see non-M&A collaborations including joint ventures, partnerships and alliances. If they do, Marsh warns that companies should review their D&O policies to make sure these other structures are covered.
  • Cyber insurance will evolve in order to address more D&O-related risks such as business interruption, and a potential bridge of financial, professional and property insurance programs in order to prevent coverage gaps. Marsh added it sees data analytics also informing evolving cyber coverage.
  • Payouts will rise for Employee Retirement Income Security Act fee litigation settlements. “Given the large dollar amounts that are held in 401(k) plans today, and the recent successes of plaintiff firms, fee cases remain sufficiently attractive for plaintiffs’ lawyers to pursue, the report noted.
  • The emergence of financial and technology risks. Marsh notes that financial and technology advances are converging, but they have added risk exposures to corporations that were typically more technology-industry-related. Subsequently, financial regulators don’t always know how to “classify new players whose risk profiles combine the two sectors,” Marsh said.
  • A rise in D&O/Errors and Omissions claims due to global enforcement cooperation, with joint sharing of information and tactics. Along these lines, regulators in the U.S. and elsewhere are often rewarding whistleblowers, Marsh said.

Source: Marsh’s full report is “The U.S. Financial and Professional Market in 2017: Our Top 10 List.”

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