D&O insurance market shows capacity and competition

Commercial insurance buyers should see a healthy market and potential rate reductions for their directors and officers (D&O) liability coverage in 2015, with strong competition from insurers, particularly on excess policies, according to a new report from Marsh LLC.

Public companies were more likely to see premium decreases, with an overall rate range of 2% decreases to 2% increases. The swing was more dramatic for private firms, a range of flat prices to 15% increases, Marsh’s D&O practice leader Brenda Shelly reported. The market showed restraint on competitive pricing, taking into account insureds’ past experience while underwriting.

“Insureds with strong and stable risk profiles generally experienced rate reductions, typically while maintaining retention levels,” stated Shelly in Marsh’s U.S. Insurance Market Update. “Those with more volatile profiles experienced retention and rate increases with a frequency that outpaced overall averages. For the last 12 to 18 months, private and nonprofit organizations have experienced rate and retention pressure. This trend follows a prolonged period of softer rates, expanding coverage, and rising claims frequency and severity.”

Marsh found increases to be more readily applied to primary policies, with price decreases on the excess side resulting in average overall decreases due to “robust competition for excess and A-side difference-in-conditions(ADIC) program layers along with abundant capacity.”

In the last two years, while insurance pricing for D&O dropped, insurers kept busy issuing new forms to expand or add coverage in response to client needs. Marsh reported finding a welcome corporate audience for improved coverage for the costs of regulatory investigations coverage, plaintiffs’ fees coverage in affirmative cases, and limit reinstatements. The regulatory investigations coverage has proven more popular, as Securities and Exchange Commission (SEC) examinations into corporate practices ramp up. Marsh highlighted this as a primary concern going forward for directors and officers, as D&O policies will traditionally cover individual insureds, but not the corporate entity unless tied to a specific named insured – and then only with a corresponding securities claim.

“Public companies faced high levels of enforcement actions by the SEC and other government regulators as a result of investigations and whistleblower tips,” stated Shelly. “Many of these actions involved resultant civil litigation. The SEC filed a record 755 enforcement actions in fiscal year 2014, driving $4.6 billion in disgorgement and penalties, increases of 686 and $3.4 billion, respectively from the previous year. Activity in this area is expected to escalate as the SEC has committed firmly to continued corporate and individual accountability.”