Private Company/Not for Profit D&O

Cyber Liability

Employment Practices Liability

Variations in Coverage

Introduction

In the past 4-5 months new capacity has entered the D&O insurance marketplace and there has been a significant decrease in the number of federal securities class action lawsuits. For the first time in several years the marketplace continues to stabilize, and some insureds are seeing premium decreases, although we expect moderate increases of up to +5% to be more common. Decreases are likely to be primarily contributable to heightened competition for excess D&O and excess Side-A coverages; increases in retention levels should begin to ease slightly, except for Initial public offerings (IPOs) including Special Purpose Acquisition Company (SPAC) IPOs, although such retentions should be less than last year.

We expect D&O insurance market conditions to continue to moderate, however, unknown outcomes from any future pandemic, effects of an escalation of the Ukraine/Russia conflict, and US monetary policy could negatively impact the current D&O insurance market trajectory.

Certain industries such as healthcare, crypto currency, biotechnology, life-sciences, technology, cannabis, and those with recent significant D&O claims activity will continue to face challenges in obtaining favorable renewals or initial placements.

Public company D&O

Although most public US companies have experienced price increases over the past 18 months, America isn't alone in this trend. D&O pricing in the UK,Australia and other major economies are up as well. Continue to expect underwriters to narrow coverage scope and peel back or eliminate once- common coverage enhancements. Expect insurers to take more aggressive positions in pricing due to limited competition. Industries with unique risks, such as life sciences, tech companies and others, should expect difficulties maintaining current scope of coverage, pricing, and retentions. Organizations anticipating or preparing for an initial public offering (IPO) will face considerable continued underwriting scrutiny which can lengthen the time needed to secure coverage.

Public companies with recent significant premium increases in 2020 and Q1 and Q2 2021 or those with the most favorable risk profiles and loss experience, saw premium increases of approximately 20-50% for primary layers and 20-65% for excess layers. For Side-A/DIC, increases have generally ranged between 15-40%. Problematic accounts saw up to or greater than 100% increases with some insureds potentially being non-renewed by incumbent insurers. Oil and gas, crypto, cannabis, hospitality, retail, higher education, and liquidity challenged risks faced the greatest challenges. All public companies should continue to expect insurers to try to pull back on coverage, including but not limited to the removal or reduction of reinstated limits for Side-A DIC coverage, more costly extended reporting period (ERP) terms, and the reduction or elimination of investigation costs coverage for shareholder derivative demand investigation expenses.

Such changes have been driven largely by derivative litigation, environmental, Social and Governance (ESG) issues, Securities Class Action frequency (SCA), Initial Public Offerings (IPO), COVID-19 factors, and corporate insolvency concerns as described below.

Derivative Litigation. An increasingly substantial number of securities claims are being brought derivatively on behalf of the company against an individual director or officer. Once commonly settled for attorney's fees and changes in corporate governance, such as improvements in cyber security, such suits now often seek significant compensation. An increasing number of derivative suits are "event-driven" and have as their underlying allegation wrongful acts or inaction in response to events such as alleged discrimination, climate change, cybercrime, and other trending events. Most derivative suits are non-indemnifiable; however, affordable coverage has historically been available through side-A coverage. Because of the rising frequency and cost of derivative claims, companies should also expect modest premium increases and limitations in coverage for Side-A.

Environmental, Social, and Governance (ESG) issues. Shareholders are increasingly raising corporate governance concerns over emerging environmental and social issues. For example, there has been a growing focus by activist shareholders and the public over corporate management and Board diversity and climate change. Activists are seeking changes to corporate policies and greater disclosures on financial statements. Many companies have already been the targets of derivative securities suits alleging breach of fiduciary duty. Insurers are taking notice and companies can expect increased questions by underwriters into board composition and related policies.

Securities Class Action (SCA) Frequency. Given the high volume of filings and the fact that the number of publicly listed companies has decreased by nearly two-thirds since 2000, the chance of a public company being named in a securities class action has grown exponentially.

Initial Public Offering (IPO). Companies looking to go public through a public stock offering will continue to face significant challenges in securing even limited D&O insurance. These firms will face significantly higher D&O premiums than for established public companies. The market for IPO D&O insurance is limited so expect extremely high retentions of up to $10 million or higher as well as reduced capacity.

Covid-19. D&O insurers remain concerned about securities class actions by investors. Such claims often allege failure by companies to inform shareholders of or downplay the impact of COVID-19 on business. Inadequate company health and safety precautions to prevent the spread of COVID-19 is a growing basis for D&O claims. One wrongful death suit alleged that a major retailer did not thoroughly clean and disinfect its store, implement and promote social distancing, warn employees of the risks of COVID-19, or to provide adequate personal protective equipment to employees, which allegedly resulted in the death of an employee. A similar wrongful death action was filed against a cruise line company regarding the death of a passenger who allegedly contracted COVID-19 aboard the company's cruise ship.

Corporate Insolvency Concerns. Global financial dislocations created largely by the COVID-19 pandemic, continues to negatively impact many organizations. Such economic dislocations have resulted in a large number of organizations filing for bankruptcy protection. Insolvency and bankruptcy are key causes of D&O claims for both publicly and privately held organizations. Insolvency-related claims can result from stakeholders alleging that senior leaders did not carefully plan for financial disruption or did not respond correctly or swiftly enough to prolonged periods of reduced revenue, ultimately putting the senior leadership team at fault for the financial hardship.

All companies should continue to expect heightened underwriting and financial scrutiny and longer, more rigorous, renewal processes with account-specific coverage restrictions. Primary insurers may also continue to limit available capacity for primary layer placements, so anticipate a potential reduction in the amount of primary coverage limits that will be available, which may be as low as between $5-10 million. Some insureds may continue to find that reasonably affordable D&O coverage is not available and may be forced to consider alternative risk transfer vehicles, such as captive insurance programs.

Hard Market D&O Renewal Best Practices

Most insurance brokers recommend that clients start a hard market renewal process early and to prepare senior management and the board of reasonable objectives and expectations. The following are best practices based on broker comments we received:

Start the Process Early To achieve the most favorable results it is crucial to start the renewal process early, whether you intend to market your program or not. It is highly recommended to allow 120 days for the process. Be prepared, however, for underwriters to be reluctant to open their renewal underwriting files much earlier than -45 days before the renewal. Resist such a position and instruct the broker to be diligent getting the underwriting file working as soon as possible.

Manage Expectations. Senior executives, board members and others must be prepared for the renewal and negotiation processes to be difficult, time-consuming and have the potential for unfavorable results. Provide regular reports of market conditions, trends and (rest of sentence needed) Be Prepared. Anticipate increased underwriting scrutiny and be prepared to provide more detailed financial and other information to insurers than during earlier renewals. Get your renewal applications done early and be thorough. An incomplete renewal application may delay or place your renewal in jeopardy.

Stay in Contact. Make sure you are in continuous and regular contact with your broker on their renewal activities, the application process, its status, and all underwriting concerns. Ask your broker to arrange for one-on- one calls between underwriters and key executives, if necessary. Such meetings can be crucial to establishing a favorable view of your account. Use such opportunities to highlight your company's strengths and to respond directly to any actual or perceived weaknesses. With your broker, be sure to identify those weaknesses well before the call and develop an appropriate response.

Develop your strategy. Your organization's priorities may be significantly different from those of peer organizations. Client and broker should work closely to create a plan based on the organization's unique risk profile, culture, budgetary considerations, and goals. Define and articulate your primary goal(s), which may include but not be limited to, reducing or maintaining premium, keeping current coverages (possible added cost).

Consider Alternative approaches. Effectively dealing with a hard D&O market may call for considering alternative approaches. Consider changes to program structure, including adjusting deductibles/retentions, limits, and/or participating insurers. Expanding relationships with specific insurers, meanwhile, could allow for greater access to capacity. Managing D&O risk via a captive could also help to control costs while still ensuring robust protection. Some companies have expressed interest in D&O trusts, through which companies can set funds aside in a bank account managed by a trustee, who can indemnify directors and officers and pay out in the event of claims according to the terms and conditions outlined in a contract between the company and trustee.

Private Company/Not for Profit D&O

Private company and not-for-profit D&O renewal premiums are anticipated to also moderate. Our survey of major D&O insurance brokers and agents shows primary and excess layer renewals increasing 0-15%%. Similarly, retention increased are also expected to moderate. Private company and not-for-profit D&O coverage have traditionally been extremely broad, often including full entity coverage. Continue to be alert for restrictions or elimination of some coverages as underwriters may continue to try to limit exposure to loss which may include but not be limited to:

Elimination of separate Side-A coverage limits, Specific COVID-19 exclusions, elimination of anti-trust coverage extensions, addition of privacy and confidentiality exclusions, and governmental funding exclusions. As with public company renewals, underwriters will be seeking more information regarding COVID-19 as well as cyber and social justice exposures.

Cyber Liability

Sometimes as part of a D&O policy but increasingly written as a separate coverage grant, cyber liability insurance has entered a new phase. By some estimates there now are over 500 insurance companies offering some form of cyber liability or related coverage. The global cyber insurance market is projected to grow by 21% in 2021, approaching $10 billion in value, the result of greater recognition of the increasing cyber-threat exacerbated by the shift to remote working due to Covid-19. The market is expected to grow at a Compound Annual Growth Rate of 24.90%.

Similarly, the number and severity of claims has steadily risen over the last several years, increasing from just under 100 claims in 2016 to nearly 1000 claims in the first three quarters of 2020. In response insurers are becoming increasingly sophisticated in their underwriting approaches, often employing "big data" analytics and emphasis on evaluating corporate culture related to sensitive data.

Some brokers we have talked to continue to express frustrations in arranging larger layers or towers of coverage of more than $10 million on single placements and are starting to see pullback in cyber extortion coverage especially where Two-Factor email authentication is not present.

Expect year-over-year premium increases for both primary and excess coverage of 10-30% to continue. For certain businesses, such as retail and healthcare (which has been particularly hard hit with claims) be braced for much higher year-over-year premium increases of 30-100% or higher, with few insurers even willing to write such classes. Most insurers now focus heavily on employee training, security, outsourcing of data infrastructure, and how insureds manage sensitive data. Expect cyber coverage, either stand-alone or within a D&O policy, to evolve to address business interruption exposures and heightened work from home exposures because of the COVID-19 pandemic.

Coverage continues to evolve, and insurers are moving to affirmatively address coverage for claims stemming from new regulations governing data protection such as the recently enacted General Data Protection Regulation (GDPR) in the European Union (May 2018) and the California Consumer Privacy Act. Many other states and countries are considering similar regulations. We are also seeing coverage being available for loss of business income resulting from cyber events and a movement to address gaps in coverage under liability and property policies.

Employment Practices Liability

For EPLI coverage, which is often written in conjunction with D&O coverage, capacity stays stable, at least for domestic markets, but because of COVID-19 and continued social dislocations expect price increases of between 5-25% for primary domestic market placements. Expect similar increases for excess liability placements. Media and entertainment risks', healthcare, and distresses risks should brace even higher increases.

Coverage scope should remain stable except for retentions. As with D&O, insurers are seeking higher retentions of up to and more than 100% over expiring retentions. Underwriters will be carefully examining COVID-19 crisis response actions such as pay cuts, furloughs, and layoffs as well as location (state), percentage of unionized workers, and average compensation.

Especially problematic will be California employers, and employers with highly compensated individuals. Retentions for such exposures may be even higher. Certain types of claims such as class action claims may similarly be subject to a higher retention amount. COVID-19 exclusions may also be added, although they are on a case-by-case basis at this time.

Societal shifts and changes in corporate culture are increasingly holding companies and key executives accountable for employment issues related to gender bias, inclusion, and diversity. Fueled by the #MeToo and other movements, underwriters will be giving increased attention to a company's internal policies and procedures, training, and claim management. Also, of concern to underwriters are pay-equity issues. California, Massachusetts, and New York have all bolstered existing equal pay laws and insureds should expect inquiries from underwriters regarding whether pay equity reviews are performed. In Illinois, the Biometric Information Privacy Act of 2008 (BIPA) has been the subject of numerous recent class action claims and similar laws may be forthcoming from other states.

Because of the long tail for EEOC and Reduction-In-Force (RIF) related claims, adverse claims may develop well into 2021, and possibly beyond even if the economy returns to pre-pandemic levels.

Variations in Coverage

The expansion of the D&O market since its early beginnings has done little, however, to consolidate or standardize policy forms. Although many policies appear to be similarly based on one another, they each have their own mix of unique characteristics and provide varying levels of protection. This underscores the need of agents, brokers, and insureds to firmly establish an understanding of D&O liability and insurance before attempting an evaluation of coverage. In addition, many D&O policies are now designed to supply added optional coverage parts such as employment practices liability, fiduciary liability, and other related coverage through endorsement or attachment of separate insuring agreements. Such package policies require an even higher level of examination and can complicate already tedious comparison of forms to one another.

Contributors to FC&S D&O Though many people took part in preparing this publication, the original details of analysis and draft were the work of Gary W. Griffin, ARM, of G2 Risk Consulting with the help of Alan P. Schreibman, ARM, of Integrated Risk Management.