Cyber changes the landscape
“Not as soft.” That’s the prediction in the directors and officers (D&O) section in the Marketplace Realities 2018 report published by Willis Towers Watson. But make no mistake; underwriters are wary of activity that could impact the industry from a rate perspective.
That potential is putting just a little pressure on competition, according to the Willis report. Still, the overall market is expected to remain competitive and stable.
Yet cyber could change the landscape. Cyber renewals in both primary and excess areas are experiencing single-digit increases, which the report attributes to increased connectivity via the Internet of Things (IoT) technology and increased ransomware attacks, including WannaCry, Petya and NotPetya. Willis predicts annual cyber premiums to increase through 2018, reaching $10 billion by 2020.
The market up close
D&O experts concur with the report’s findings. John Immordino, vice president for Arlington/Roe, has seen a competitive, soft market with pricing remaining flat or decreasing. He says rates have shown little movement, and cyber endorsements are being added.
Yet in that area of exposure, Immordino believes the industry is split in its opinion. “The big debate is whether an endorsement is appropriate coverage as opposed to providing a separate cyber policy,” he explains. “The problem is that endorsements to a management liability product can become outdated and inadequate. Monoline cyber coverage can change as exposures change, and can be quicker to respond to the marketplace.”
Laura Coppola, regional head of Financial Lines, North America for Allianz Global Corporate & Specialty, says the extremely competitive market has shown some signs of rate stabilization within certain segments—for example, life science, biotechnology, IT/technology, pharmaceuticals and healthcare. “It is too early to tell if 2018 will offer further rate stabilization or even rate increases, as the market continues to have an abundance of capital available with aggressive terms and conditions,” she adds.
Jeff Gauthier, senior vice president of market relations for Great American Insurance Group’s Executive Liability operation, says that, despite the abundance of capital, he’s seen a number of large carriers pull back within the last year in terms of the size and class of business accounts they will entertain from an underwriting perspective. “Several carriers retreated in the public sector. We see more carriers entering the private D&O space in order to diversify out of the public D&O space. This isn’t surprising, given the continued increase in securities litigation (it’s at a 10-year high) even though the equity markets are trading at all-time highs,” Gauthier says.
The claims picture
That market hesitation by large carriers could be due to increased claim activity in one or more areas of D&O. “Claims activity is at an all-time high, as securities litigation and merger objection lawsuits have increased,” says Immordino. “However, to date, little change has been made in rates as a result.”
Immordino adds that crypto currency and data breach suits are beginning to drive claims activity. That, he says, is putting pressure on those at the top. “Directors and officers are being held to increasingly higher standards in managing tight cyber security protocol.”
Other areas of concern: U.S. securities class action suits and U.S. regulatory/criminal investigations. Ned Kirk, partner at global law firm Clyde & Co., says, “Despite a series of recent favorable defense holdings by the United States Supreme Court, U.S. plaintiffs lawyers are filing increasing numbers of securities class actions against public companies and their directors and officers, including against a large number of foreign-based companies engaging in securities transactions in the United States. Securities class actions reached record levels in 2017 and will continue to be the most daunting D&O claim driver.”
Kirk says that, post-recession, U.S. officials “aggressively pursued” companies for regulatory violations, including Foreign Corrupt Practices Act and money laundering statutes. “As a result, D&O insurers have seen increasing exposures to settlements and costs in U.S. securities class actions, as well as significant costs for responding to regulatory and criminal investigations and actions,” he adds.
Also, Kirk says that cases related to cyber disclosures are being tested in the courts, as are climate change cases. “If those cases survive motions to dismiss, these types of cases could contribute to even higher numbers of securities class actions,” he says.
“In 2018, it appears that the number of new filings will continue to be well above average; and if the economy takes a turn for the worse or new filing trends develop, we could see unprecedented numbers of securities class actions in the New Year,” Kirk says.
“We are also expecting to see more sexual harassment suits in 2018,” he adds. That is an area that has already begun to get a toehold in the D&O space. Last year, 21st Century Fox, Inc., reached a $90 million settlement with shareholders regarding claims about the sexual harassment scandal at Fox News.
Even with increased concerns in a number of areas, Immordino says extraordinary claims have not happened. He does, however, predict that with claims at all-time high levels, loss ratios will soon catch up and rates will be adjusted accordingly.
Gauthier echoes that sentiment. “From a pricing standpoint, we are starting to see increases on primary public accounts. Smaller accounts and private and nonprofit accounts may experience flat to slightly higher pricing, depending on the risk characteristics of the account,” he says.
What may push pricing in the future, says Gauthier: “The highly publicized #MeToo harassment cases could impact policies with employment practices coverages and a more active Department of Labor is affecting the fiduciary liability space.”
Still, Gauthier says that policy forms will continue to expand definitions, bringing broader coverage to the market, plus carriers will be introducing new products. “We are currently in the process of adding a new E&O coverage part to our Private Solutions ‘combo’ policy, which includes D&O, EPL, fiduciary and crime coverages. The focus of the new E&O product will be for financial institutions driven by the recent proliferation of fintech companies. We will be looking to add a cyber coverage part, as well,” Gauthier adds.
The cyber debate
That’s a good thing: Cyber liability in D&O is on the rise, say all of the experts. “Cyber exposures and the coverage thereof continue to evolve in size, scope and scale,” says Coppola. “The fiduciary duties imposed on corporate boards will likely expand as further directives by the SEC become known and investigations continue to evolve. Disclosure requirements will likely expand over time.”
“There are a few carriers offering limited D&O-style cyber coverage as part of a larger cyber policy,” says Ellie Feldman, managing partner at Wingman Insurance. “This will sometimes cover an executive officer for claims made against them as a direct result of a cyber-security event.
On the whole, Feldman sees this coverage typically as “window dressing, and we do not advise our agents and their clients to rely on the limited coverage offered on these D&O clauses in a cyber policy to replace the comprehensive coverage of a D&O policy. A good D&O policy should cover these claims, not a cyber policy.”
Still, Immordino says, cyber claims will continue to make a significant impact on the industry. Where in the past, plaintiffs struggled to make their case, litigation will continue to develop that will put the onus on the insureds. “Agents can work on educating their business insureds as to the increasing risks, the appropriate coverages available and strategies to strengthen both the company’s security and coverage,” says Immordino. “For example, insureds need to know that companies utilizing ICOs (Initial Coin Offerings) to raise capital are very much on the radar screen, so to speak, of the U.S. Securities and Exchange Commission.”
Gauthier says cyber will continue to be the “topic du jour” in the market, particularly since smaller accounts also are being affected. “The ‘little’ guy is beginning to realize they have exposures, too,” says Gauthier. “Cyber risk is not just contained to the large retailers and financial institutions that have suffered catastrophic breaches.”
Advice for agents and brokers
That’s where agents and brokers can help insureds understand their exposures, says Gauthier. Coppola agrees, adding that “brokers and agents should be well-informed on the market, its exposures, and how a company can protect its liability along with the individual protecting his/her personal liability in serving in such capacity.”
“Agents need to be sure their clients know that the average judgments, settlements, fines and legal fees involved in such lawsuits are big money to lose,” says Immordino. “Helping them understand that ‘if there’s no coverage, there’s no defense’ goes a long way toward selling the appropriate insurance and protecting the client’s best interests.”
Feldman says that companies that are starting, growing, or scaling a business reliant on outside funding are particularly vulnerable. “Agents who can successfully convey to insureds that D&O coverage is an integral part of a good risk management strategy have a clear leg up on the competition,” she says. “We like to think that the time to buy D&O is when you start raising outside capital or launch your product, but we often find coverage is not purchased until an investor requires it.”
Also, Feldman says, one talking point for agents and brokers can be how D&O insurance can be used to attract top talent. “A company that is savvy enough to have D&O can convey that they protect themselves, investors, and any members of the board of directors; and that can be advantageous when raising money, filling board seats, or during early stage company growth,” she adds.
Still, Immordino says that education is still the best way to sell D&O successfully. “Agents can utilize claims examples in their insured’s specific industry to demonstrate the need for D&O coverage combined with monoline cyber insurance as a defense.”
He adds that with rampant lawsuits and people seeking deep pockets, the coverage is even more critical. “Even something as simple as one company talking with another about a possible M&A opportunity can lead to a lawsuit, as well as objections after a merger. It’s sometimes difficult to convince insureds, but directors and officers can be held liable for their actions.”
For more information:
Allianz Global Corporate & Specialty
Clyde & Co
Great American Insurance Group
Lori Widmer is a Philadelphia-based writer and editor who specializes in insurance and risk management.