While the scope of coverage offered should remain strong, there will likely be resistance to any further broadening of coverage. All public companies should continue to expect insurers to attempt 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 (SCA) frequency, Initial Public Offerings (IPOs), 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 continue to anticipate modest premium increases and possible 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. According to the Cornerstone Research Securities Class Action Filing Report 2022 Midyear Assessment, SCA filing activity in the first half of 2022 increased only marginally from 107 to 110 suits. However, the measure of severity of market capitalization loss, Maximum Disclosure Loss (MDL) and Disclosure Dollar Loss (DDL), both increased dramatically. During this period, MDL more than tripled from its 1997-2021 semiannual average to a whopping $1.57 Trillion. Similarly, DDL more than doubled from $210 Billion in H1 2021 to $482 Billion in H1 2022.

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 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, in part, by the COVID-19 pandemic and exacerbated by inflation and supply chain disruptions, continue to negatively impact many organizations. Such economic dislocations have resulted in many 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 adequately 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.

Climate-Related 'Greenwashing' litigation. Making unsubstantiated, false, or misleading claims about a company's environmental or social performance or products (greenwashing) is of growing concern for directors, officers, and insurers alike. On Earth Day, April 22, 2021 Mayor Bill de Blasio announced the filing of a lawsuit against Exxon, Shell, BP, and the American Petroleum Institute for false advertising and greenwashing, in direct violation of New York Consumer Protection Laws. Similarly in May 2022, a Dutch environmental group sued airline operator KLM, alleging that its "Fly Responsibly" advertising campaign amounted to greenwashing because they did not disclose associated negative climate impacts. According to the Climate Social Science Network, there have been at least 20 climate-washing cases filed before courts in the US, Australia, France and the Netherlands since 2016. The SEC recently proposed mandatory reporting of climate risk and if this proposal becomes final, legal experts predict an increase in litigation in this area along with D&O insurance claim disputes.

All companies should continue to anticipate heightened underwriting and financial scrutiny and longer, more rigorous, renewal processes with account-specific coverage restrictions. Some primary insurers may also continue to limit available capacity for distressed classes, so anticipate a potential reduction in the amount of primary coverage limits that may 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 or increased retention of risk, both in the form of greater retentions and/or reduced limits of protection.

Private Company/Not-for-Profit D&O

Private company and not-for-profit D&O renewal premiums are anticipated also to moderate. Our survey of major D&O insurance brokers and agents shows primary and excess layer renewals increasing 0-15 percent. Similarly, retention increases 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.

D&O Renewal Best Practices

While the D&O industry may be turning its back on the most recent hard market, most insurance agents and brokers continue to recommend that clients start the renewal process early and to prepare senior management and Board members of reasonable and realistic 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 underwriter 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 to have the potential for unfavorable results. Provide regular reports of market conditions, trends and adjusted expectations, as necessary.

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(s) 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 and keeping current coverages.

Consider Alternative approaches. Effectively dealing with a challenging renewal may call for considering alternative approaches. This may include changes to program structure, including adjusting deductibles/retentions, limits, and/or participating insurers. Expanding and strengthening relationships with specific insurers 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.

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. Although the last few years have seen increased competition among cyber insurance carriers, greater capacity for limits of protection, and expanded coverage terms, 2021 saw the beginning of a rapidly hardening cyber insurance market that resulted in premium increases of up to 300% and higher. In addition to imposing significant premium increases on policyholders, most insurance companies also have begun "sub-limiting" certain coverage components, such as ransomware and cyber extortion , while simultaneously applying co-insurance provisions. The primary reasons for these changes include:

Changing Cyber Insurance Market. The cyber insurance market experienced significant and escalating losses driven in large part by increased frequency and severity of so-called "Ransom" or "Ransomware Claims," as well as increasing frequency and severity of cyber related liability claims. Efforts by the cyber insurance market to remain profitable have included selective reduction in available limits, increased retentions/deductibles, imposition of co-insurance, and across the board significant increases in cyber insurance premiums. A chart based on Fitch Ratings, Council of Insurance Agents and Brokers data, illustrates steadily growing premium rates between Q1 2019 and Q4, 2021.

For the first time in six quarters the average premium increase fell below 20% and is now 15%. Possible reasons for the trend of smaller increases may be fewer cyber claims, insurers having caught up with a historically underpriced product, and insureds taking more risk in the form of higher deductibles/retentions. In addition, continued stringent underwriting requirements have likely improved insured resiliency from ransom and related claims. The Process for Securing Coverage Has Changed. The minimum level of cybersecurity needed to purchase cyber insurance started to increase in 2021 over the prior year. Fewer companies were offering cyber insurance and the process to procure/renew coverage took longer. As a result, over 90% of organizations that have cyber insurance have recently fortified their cyber security defenses to improve their ability to purchase cyber insurance .

Major Market Shift. An already hardening cyber insurance market worsened following widespread media coverage of the May 7, 2021, ransomware event involving Colonial Pipeline and their payment of a $4.4 million ransom.

MFA Requirement. One of the main changes in underwriting criteria is Multi-Factor-Authentication (MFA). Most Insurers now require insureds to have MFA, endpoint detection, multiple backups, disaster recovery plans, awareness training and related cybersecurity features before offering a premium quotation.

Continued COVID-19 Disruptions. In addition to the direct and unexpected disruption caused by COVID-19, more subtle, and lingering dislocations occurred due to heightened COVID-19 infections in December, 2021. Such disruptions contributed to delays in the general conduct of day-to-day insurance business. The processes of underwriting information collection, communications, obtaining quotes, and issuing insurance policy documents were all negatively impacted.

Some brokers 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 MFA email authentication is not present.

While most cyber insurance policyholders may experience higher cyber liability insurance premiums throughout the remainder of 2023, we expect a continuation of the trend of lower increases from prior periods, but with many insureds continuing to see double-digit rate increases ranging between 12-50% or more. Insureds not meeting minimum underwriting cybersecurity control standards may have great difficulty obtaining affordable and meaningful cyber insurance protection.

For certain businesses, such as retail and healthcare (which has been particularly hard hit with claims) policyholders should be braced for year-over-year premium increases of 25-100% 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

While the employment practices liability Insurance (EPL) market has improved slightly, we expect continued challenges throughout 2023.

For EPLI coverage, which is often written in conjunction with D&O coverage, capacity should remain stable, at least for domestic markets. Because COVID-19 related claims continue to evolve, expect year-over-year price increases of between 5-30% for primary domestic market placements with good to excellent controls in place. Expect similar increases for excess liability placements. Media and entertainment risks, healthcare, retail, hospitality, leisure, and distressed accounts, including employers in California and elsewhere should brace for even higher increases.

Coverage scope should remain stable except for retentions. As with D&O, insurers continue to seek higher retentions on a case-by-case basis. 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 continue to be California, New Jersey, New York and Florida 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 continue to be on a case-by-case basis.

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 have been 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 continue to develop throughout 2022, and possibly beyond, even if the economy returns to full pre-pandemic conditions.

As more companies and public entities reopen, return to normal operations, and more employees return to work, underwrites are carefully monitoring employment practices liability insurance claims based on vaccine mandates, lockdowns, layoffs, rehiring, and other related actions/inactions.

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, cyber and other related coverages through endorsement or attachment of separate insuring agreements. Such package policies require an even higher level of examination and can complicate the 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 assistance of Alan P. Schreibman, ARM, of Integrated Risk Management.