Discipline is key in D&O insurance market, Zurich leader says

With directors and officers insurance premiums on track to hit a nine-year low, insurance professionals gathered in New York to grapple with that reality and discuss the ins and outs of the evolving D&O market.

Networking, business development and education were on the agenda during the 2024 PLUS D&O Symposium, which was held March 5-6 in New York. Panel discussions covered a range of trends and topics, including the impacts of new insurance capacity, business bankruptcies, regulatory concerns and securities litigation, as well as environmental, social and governance (ESG) concerns.

The event kicked off with a panel of insurance professionals providing a global view of the U.S. D&O market. Much of the discussion mirrored what the credit agency A.M. Best reported earlier in the week when it issued a negative outlook for the D&O liability insurance segment, saying supply was outpacing demand, driving down prices for D&O coverage.

The dynamics leading to the current D&O market are not altogether new. Brian Mastellone, Head of Management Liability – Public for Zurich North America, cited three straight years of strong rate growth for D&O coverage between approximately 2018 and 2020, what insurers and brokers call a “hard” market. Those higher premiums led insurers to offer new or additional D&O insurance capacity, which then drove rate pressure starting in late 2021. This is similar to what occurred about two decades ago when Mastellone began working in the D&O space.

D&O insurance buyers today may be pleased with the declining prices, but Mastellone and other panelists said this trend may not be sustainable.

In addition to Mastellone, those panelists included Heather Marino, Financial Lines Underwriting Manager for W/R/B Underwriting; and Craig Hieserich, Vice President of Professional Lines for Allied World Assurance Co. The discussion was moderated by Jennifer Thorpe, Chief Client Officer for Aon’s Financial Services Group.

3 factors that could affect the D&O market

Profitability becomes a question when prices fall too low, panelists said. In an era of social inflation, jury awards in litigation are hitting record highs. If premiums aren’t sufficient to pay for future claims losses, the gap leads to a market correction that can quickly reverse the pricing trend. Big changes can be difficult for businesses to bear.

Mastellone said three factors could potentially have an impact on D&O profitability and capacity in the near future: increasing claims severity, changes to reinsurer appetite and strategy in financial lines, and insurance company consolidation.

“I think it’s important for all of us to educate clients and brokers about how the D&O claim environment is evolving and the importance of rate stability so we do not get to a place where the rates seem to move up significantly overnight,” Mastellone said.

Although the D&O market saw significant rate increases during the most recent hard market, Mastellone said history indicates that when that pricing trend turns, D&O margins can become too thin.

A.M. Best reported on March 5 that premiums for D&O have decreased nearly 20% since peaking at $14.9 billion in 2021. The agency estimates premiums of about $12 billion this year, the lowest level in nine years.

Mastellone emphasized the need for diligence in managing a D&O portfolio through all market cycles. In the past, he has seen some carriers increase their limit size as a way to generate more premium when rates deteriorate. So far in this D&O cycle, he said it appears carriers have learned from past mistakes and are carefully managing limits.

Maintaining discipline in all aspects of portfolio management and keeping a balance with other products, Mastellone said, can help carriers and their customers experience greater stability through the market cycles.

What directors and officers should know

The panel moderator asked the panelists if they thought their customers understood their D&O coverage sometimes can be applied to risks beyond the core exposures of the directors and officers it is meant to protect.

Mastellone said that if he served on a corporate board, he would want to make sure he understood the technical components of the coverage and that the limits would provide coverage for who and what they are intended. D&O placements traditionally cover the company in the event of a securities claim, he said, but now with entity investigation coverage offerings, many policies have broadened and limits can be applied to other perils.

When underwriting a D&O policy, he said it is important not to overlook a company’s culture and its reputation.

“Every company over the course of 12 months will have a story,” he said. “Their revenue may be up or down. Their margins will expand or come under pressure. They may have an executive leave or they may make a large acquisition. These considerations are all part of our [evaluation] process. But I think knowing how a company operates and getting insight into the culture is also really important, as D&O underwriters have to have a sense of whether the company is responsibly managed.”

Mastellone said he values conversations with brokers and clients’ senior leaders that may include a chief financial officer, risk manager or general counsel – or all three – throughout the underwriting process. Whatever the market conditions, he said he prefers sitting down and meeting face-to-face to get a better understanding about a company’s culture and talk through any risk profile or coverage concerns.

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