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  • February 18, 2024

2024 Market Outlook: D&O Insurance

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2024 Market Outlook: D&O Insurance

2024 Market Outlook: D&O Insurance 1024 536 Dominion Risk

Throughout the past five years, the D&O insurance segment has been characterized by frequent and abrupt changes, largely brought on by technological advancements and evolving cyber risks; environmental, social and governance (ESG) developments; and litigation shifts. According to industry data, the majority (between 75% and 96%) of publicly traded companies experienced ongoing rate increases from 2018-21; yet, by the first quarter of 2022, only about one-third (34%) of such policyholders encountered rising premiums. This market moderation pressed on in 2023 as rates continued to soften. In fact, industry research found that 91% of publicly traded companies saw reduced premiums in the first half of the year, with average rate decreases ranging between 10% and 25%. These improving conditions are likely the result of new market entrants, bolstered underwriting appetites and growing capacity for higher excess layers of coverage, which have fostered increasingly competitive market dynamics.

Although the segment has also started to stabilize for private and nonprofit companies, these organizations are still deemed higher risk by carriers than their publicly traded counterparts. As such, industry data confirmed that rates for these policyholders have continued to increase, albeit at a slower pace than in prior years. Heading into 2024, industry experts anticipate that favorable market conditions will persist, allowing for decelerated premiums and widened capacity. However, industry research confirmed that more than three-quarters (79%) of D&O underwriters believe segment risks are still increasing. With this in mind, even as overall conditions improve, policyholders operating within challenging industries, possessing poor loss history or utilizing insufficient risk management measures could remain susceptible to possible rate jumps and coverage difficulties.

2024 Price Prediction
Private and nonprofit companies: 0% to +5%
Public companies: -10% to +5%

Developments and Trends to Watch

AI exposures

AI technology can perform a variety of cognitive functions typically associated with the human mind, such as observing, learning, reasoning, problem-solving and engaging in creative activities. As it pertains to the boardroom, many corporate leaders have begun leveraging AI systems to create organizational files and reports, analyze company data and, in some cases, make important business decisions. According to a recent study, more than two-thirds (69%) of public companies now utilize AI tools as part of their due diligence processes. While this technology has the potential to help board members boost efficiencies, enhance objectivity and promote improved decision-making capabilities with predictive insights, it also carries unique risks. Namely, if AI systems are implemented incorrectly or rely on inaccurate human inputs, these tools could end up perpetuating biases, producing widespread errors, posing ethical concerns regarding data privacy and protection, and minimizing overall corporate transparency. In these instances, stakeholders may hold senior leaders accountable for AI-related failures, prompting costly lawsuits and subsequent D&O losses.

What’s more, legislation regarding AI technology and its use in the boardroom is constantly changing. As it stands, several federal regulations and multiple state and local laws address AI in the workplace, with a handful of additional government initiatives currently underway. This legislation primarily requires businesses to establish policies that clearly define AI technology’s roles and responsibilities in their corporate decision-making operations and ensure proper oversight of such tools to reduce the risks of potential biases, errors or privacy issues. Considering these evolving regulatory concerns, senior leaders who neglect to comply with applicable AI legislation could face significant legal penalties and associated D&O losses. Above all, because this is a relatively novel topic in the D&O space, the use of AI in the boardroom could ultimately lead to confusion regarding who is responsible for related losses and liabilities. This may make it difficult to determine how companies’ D&O coverage will respond to AI-related claims, possibly resulting in compounded risks and insurance gaps.

Litigation shifts

From 2018-21, publicly traded companies and their senior leaders were faced with a surge in litigation and related D&O claims, often as a result of (allegedly) breaching U.S. Securities and Exchange Commission (SEC) requirements or encountering challenges amid initial public offerings (IPOs) and special purpose acquisition company (SPAC) transactions. Fortunately, this litigation largely subsided throughout 2022 and 2023, thus mitigating associated losses. Here’s an outline of these litigation shifts:

  • Less securities class action lawsuits—A securities class action lawsuit refers to legal action brought on by a group of shareholders who claim to have experienced financial losses due to the publicly traded company they invested in (and its senior leaders) violating securities laws, such as SEC regulations on ensuring accurate financial statements and disclosures. These lawsuits nearly doubled over much of the past decade, peaking at 268 cases in 2019 (not including merger and acquisition-related filings or derivative cases), according to industry research. Since then, however, such lawsuits have dropped off significantly; 168 filings were recorded in 2022, representing a 37% decrease from the previous three years, while less than 100 cases took place in the first half of 2023. This reduction in litigation has, in turn, helped lower the frequency of D&O claims. Nevertheless, it’s worth noting that settlement costs stemming from securities class action lawsuits have spiked above the 10-year average, threatening to drive up claim severity. The latest industry data confirmed that these costs reached $3.1 billion in the first six months of 2023 alone, up from $2.4 billion in the entirety of 2022. That being said, businesses should remain vigilant in reducing their exposure to such lawsuits and large-scale D&O losses.
  • Fewer IPOs and SPAC deals—A SPAC is a corporation developed with the primary intention of raising investment capital through an IPO, which refers to the process of a private company going public by selling its shares on a stock exchange. The secured funds are then utilized to acquire an unspecified business (also called a target company) that is later identified following the IPO. SPACs surged in popularity at the start of the decade, with many companies viewing these transactions as a more efficient way to go public. According to industry data, SPAC deals more than doubled between 2020 and 2021, jumping from 248 to 613. Traditional IPOs also increased during this time frame, rising from 212 to 400. In response to this surge, the SEC focused on holding senior leaders who conduct SPAC transactions more accountable for potential wrongdoings, such as failing to perform their due diligence on a target company’s finances or providing shareholders with misleading information. This caused a major increase in IPO- and SPAC-related litigation and associated D&O losses. However, as fewer companies opted to go public between 2022 and 2023, these transactions cooled off by more than 400%. Specifically, industry research found that IPOs dropped to 88 and SPAC deals fell to 86 in 2022, whereas the first half of 2023 saw such transactions fall to 56 and 18, respectively. This reduced activity has provided limited avenues for litigation, keeping related D&O claims at bay. Yet, it’s vital to keep in mind that the road to the de-SPAC process, which entails a SPAC finalizing the merger with its target company, can take several months (or even years), creating a possible lag between these transactions and related litigation. This means that the high number of SPAC deals that occurred in prior years could lead to ongoing litigation and D&O losses in the future.
  • ESG issues—ESG activism has also made a noticeable impact on the D&O market. Senior leaders have been held more accountable for upholding their companies’ commitments to environmental and social initiatives by stakeholders, regulators and the public, fueling increased litigation against such leaders and associated D&O claims. Due to the ongoing rise in natural disasters, deforestation, and water and biodiversity degradation, climate change has been the main focus of ESG-related litigation, with much of the litigation alleging that senior leaders have not fully disclosed the material risks of climate change or promoted eco-friendly operations. According to the latest report from the United Nations’ Intergovernmental Panel on Climate Change, global efforts are no longer on track to limit Earth’s rising temperatures to the 1.5 degrees Celsius target by 2050, thus further motivating stakeholders to condemn companies that don’t demonstrate a genuine and proactive commitment to environmental sustainability. What’s worse, the Grantham Research Institute revealed that global climate change litigation has already contributed to more than 2,000 lawsuits and related D&O losses against businesses.

    In response to these concerns, the SEC proposed changes to its climate change disclosure rules for publicly traded companies in 2022. Such changes include requiring companies to share more details on their climate-related risks, associated mitigation measures and greenhouse gas emissions. Additionally, several international leaders and organizations (e.g., the European Union and the International Sustainability Standards Board) followed suit in 2023 and proposed similar requirements. Although these standards have faced some pushback, they are likely to take effect in the coming months and years. Altogether, such requirements could exacerbate climate change litigation and subsequent D&O losses for noncompliant companies. Complicating matters, recent research found that many companies and their senior leaders are unprepared for these rules to be enforced. According to the international professional services network Klynveld Peat Marwick Goerdeler, only one-quarter of businesses are ready to have their ESG data externally reviewed.

    Even as companies make it a priority to maintain eco-friendly operations, they should be sure to avoid greenwashing. Greenwashing refers to a deceptive marketing practice in which companies produce misleading information to trick the public into believing their products, services or mission have more of a positive impact on the environment than is accurate. This practice undermines companies that actually implement sustainability efforts and can make it harder for consumers and investors to make eco-friendly decisions. As stakeholders take more legal action in this area, setting unrealistic ESG targets could lead to additional litigation and D&O losses.
  • Cybersecurity concerns—Cyberattacks continue to surge for businesses of all sizes and sectors, sometimes leading to litigation against senior leaders and related D&O claims. After all, decisions made by senior leaders are often intensely scrutinized following cyberattacks. Possible D&O losses can arise from allegations such as senior leaders failing to take reasonable steps to protect stakeholders’ personal or financial information, implement controls to detect and prevent cyberattacks, and report incidents or notify the appropriate parties. Amid increasing ransomware threats and rising digital warfare exposures, cybersecurity has become a worldwide D&O concern. According to a recent survey, almost two-thirds (62%) of global directors consider cyberattacks, data loss and digital crime among their top D&O risks. Compounding these risks, the SEC officially voted in favor of and adopted final rules that amended its cybersecurity disclosure requirements for publicly traded companies on July 26, 2023. Originally proposed on March 9, 2022, these amendments include enhanced and standardized guidelines regarding cybersecurity governance, strategy, risk management and incident reporting. The implementation of these final rules could result in further litigation and associated D&O losses for noncompliant companies going forward.  

Tips for Insurance Buyers

  • Examine your D&O program structure and limits alongside your insurance professionals to ensure they are appropriate and take market conditions and trends into account.
  • Consult insurance brokers, loss control experts and underwriters to gain a better understanding of your D&O exposures and cost drivers in the market.
  • Work with your senior leadership team to carefully review the risks of leveraging AI technology in the boardroom and applicable legislation. Establish clear policies and procedures regarding the proper use of AI tools in corporate decision-making processes.
  • Make sure your senior leadership team carefully assesses potential exposures and maintains compliant, honest practices amid IPOs and SPAC transactions. Pay close attention to SEC requirements for such transactions.
  • Ensure your senior leaders follow safe financial practices (e.g., timely payments, educated investments, accurate documentation and reasonable reimbursement procedures). Be transparent with stakeholders about your organization’s economic state to avoid misrepresentation concerns.
  • Be sure your senior leadership team is actively involved in monitoring your organization’s unique cyber risks, implementing proper cybersecurity practices to help prevent potential attacks (especially in the realm of remote work arrangements), ensuring compliance with all applicable data security standards and establishing an effective cyber incident response plan to minimize any damages in the event of an attack.
  • Prioritize establishing eco-friendly initiatives among your senior leadership team. However, ensure that these initiatives remain realistic to avoid greenwashing concerns. Furthermore, be sure your senior leadership team conducts their due diligence and provides proper reporting as it relates to climate change concerns.