In the past twelve months, Financial Institution private andpublic directors' and officers' (D&O), general partnership (GPL), anderrors & omissions (E&O) liability insurance rates have rapidly increased,while insurers' risk appetites have firmed, but limit capacity has remained unchanged. With new retail insurance and reinsurance capacity coming online, one would expect that pricing should drop. [1] But, insurance underwriters face rating agency pressure to increase rates, so new portfolio analytics to guide insurer pricing decisions causes them to retain strict underwriting and the cautious deployment of insurance limits on certain risks (e.g., Financial Institutions). [2]  Meanwhile, the underwriting community grapples with systemic changes in the D&O risk landscape from the SPAC phenomenon. [3]  To minimize insurance spend in a market of rising premiums, one must differentiate their risk from their competitors.

As the financial impact of the pandemic continues, here is what you can expect concerning your Financial Institution D&O, GPL, and E&O insurance at both private and public financial services companies.

Private Financial Institution Directors & Officers (D&O) and General Partnership Liability (GPL)

Private company D&O/GPL is, by nature, broader in coverage than public company D&O. Unlike public company coverage, private D&O/GPL generally includes entity coverage and is often bundled with employment practices liability insurance (EPLI) and errors & omissions (E&O) coverage. 

The primary concern for underwriters is a company's financial health and its ability to navigate the pandemic. As renewals come up, the insurance risk manager should prepare the irrespective firms for a few realities:

·      Rate increase – expect an increase of 10-25%. [4]

·      Flat retentions – expect retentions to remain flat or options offered at higher retention levels to reduce premium spend.

·      Restrictive coverage – expect terms and conditions to change, typically not in a good way potentially.

Going forward, an insurance risk manager needs a proactive approach: 

·      Partner with your insurance advisor and broker as early aspossible. With the current state of the marketplace, you do not want to rush. Underwriters are receiving a high volume of submissions due to SPAC offerings, and there is a significant delay in getting quotes. [5]

·      Prioritize coverage. D&O/GPL/E&O policy value resides in its terms and conditions. Yes, premium increases are not desired, but should litigation or claims arise, an insured wants assurance that coverage will be in place. Therefore, if you have options, prioritize coverage substance overpremium.

·      Communicate. Submit complete applications with full details and meet with your insurance underwriters. This information will not only give underwriters a more in-depth understanding of your risk but potentially avoid further delays in quotations due to an incomplete underwriting submission.

·      Be flexible. You may achieve better results with flexibility and creativity.Talk to your advisor about your expectations. If saving premium dollars is a priority, your advisor may be able to find creative alternatives to help achieve it.

Public Financial Institution D&O

In the not-too-distant past, we were in a sustained soft insurance market (e.g., "thin," "narrow,"or "close" investment market) that seemed impervious to historic property and casualty losses.  In the past two years, eye-popping rate increases, and the disappearance of capacity (e.g.,"wide" investment markets) became the norm.  Now, with higher rates attracting new entrants and coaxing some capacity (e.g., capital) to come off the sidelines, increases are beginning to decelerate or at least stop climbing at the samerate. [6] It's still a challenging market, but to a large degree, the insurance cycle is — or will soon be —proven again. 

We see the emergence of not one marketplace with one crucial caveat, but two: one for "good"risks, another for, well, not so "good" risks. While there are wide variations from some insurance products to other insurance products, good risksare finding some easing of conditions, including more modest rate increases.The others, not so much. Strict underwriting and the cautious deployment of capacity on certain risks seem to persist as the underwriting community grapples with systemic changes in the risk landscape. This phenomenon is evident in Financial Institution D&O insurance. 

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Though capacity is available  for financial institution D&O, it is not as easy to procure as in prior  years. Insurers are not offering $25 million limits. Instead, most are not  going higher than $10 million; instead, most are settling to contribute $5 million, or just $2.5 million of limits. Self-insured retentions are at a minimum of $1 million. Additionally, premiums are up 15% to 25% from last  year.[7]

In the Financial Institution market, exclusions for coverage have remained relatively free from change. Insurers often seek to exclude antitrust or expand the exclusion toapply to claims alleging anticompetitive behavior instead of just the usual violation of federal antitrust laws. Still, we do not see this as a common occurrence.

Unfortunately, securities class-actions lawsuits remain the primary risk. As of April 2021, Financial Institutions were the eleventh largest recipient of securities class actions. [8]  At the same time, insurers are now seeing new claim strains -- namely cryptocurrency, data breach, COVID-19, MeTo, and SPACS. [9] A more detailed analysis of the SPAC offerings and claims impacts on the D&O insurance markets maybe found here.   

Conclusion:

The current state of the insurance market has caused sticker shock for many. But, in the coming months, we expectrates to ameliorate for differentiated risks. The rate of retentions increases to soften or even flatten, but restrictive coverage will remain for Financial Institutions.  

While 2021's insurance market shows signs of stabilization, it is unlikely to return to a pre-2019 state. To eliminate surprises, we recommend partnering with your advisers as early as possible. Communicate with them and make sure they set expectations for a successful renewal per today's standards. Be ready to provide details, be transparent, and lastly, be flexible.

To discuss your upcoming D&O, GPL, E&O, or EPLI renewal, please schedule a time with us here.

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Reference Section:

[1]$23 Billion of new capital has entered the insurance markets in the last sixmonths.  New startups have formed in Bermuda and London (see https://www.artemis.bm/news/almost-20bn-of-reinsurance-capital-raised-more-to-come-in-2021-flandro/)and see and see https://www.artemis.bm/news/not-a-supply-driven-hard-market-further-gains-expected-flandro-hx/

[2] https://www.artemis.bm/news/reinsurance-prices-must-rise-further-to-provide-adequate-returns-moodys/

[3] https://news.bloomberglaw.com/banking-law/how-spac-exuberance-led-to-a-perfect-storm-in-d-o-insurance,

[4] https://www.ivansinsurance.com/globalassets/all-documents/resources/reports/ivans-index_en-us.pdf

[5] https://news.bloomberglaw.com/us-law-week/budgeting-for-spac-insurance-five-costs-to-understand, and see https://www.insurancebusinessmag.com/us/news/professional-liability/where-dando-cover-has-soared-by-five-times-246540.aspx

[6] https://www.artemis.bm/news/reinsurance-prices-must-rise-further-to-provide-adequate-returns-moodys/

[7]Source: Concertiv Insurance Benchmarking

[8]See https://securities.stanford.edu/industry.html

[9] See https://securities.stanford.edu/current-topics.html Following the exposure of widespread sexual-abuse allegations against Harvey Weinstein in October, 2017, the MeToo hashtag began to spread widely on social media. The Clearinghouse is tracking and highlighting cases involving (1) allegations of sexual harassment by a company Executive or Director; or (2) allegations of a culture of harassment within the company.