2022 Midyear Market Outlook: D&O Insurance

Although the last few years have seen double-digit rate increases and lowered capacity within the directors and officers liability (D&O) insurance segment, market conditions have shifted in recent months. In particular, rate increases have moderated—especially for publicly traded companies. According to industry data, rates increased by an average of 3% among such companies during the first quarter of 2022, decelerating from a 10% jump and a 6% rise in the third and fourth quarters of 2021, respectively.

Taking a closer look at these trends, renewal pricing for primary and lower excess layers of D&O coverage has ranged from flat to single-digit increases so far this year. In contrast, pricing for mid- and high-excess layers has mostly decreased. Furthermore, capacity for higher excess layers has been on the rise, resulting in increasingly competitive market dynamics. While the D&O segment has also started to stabilize for private and nonprofit companies, these companies are still deemed high-risk by insurers compared to their publicly traded counterparts. Thus, rates for these companies have increased by an average of 5%-20% in the first half of 2022, according to industry data. Even as market conditions change, it’s important to note that policyholders operating within challenging industries, possessing poor loss history or utilizing insufficient risk management measures could face ongoing coverage difficulties.

Developments and Trends to Watch

New market entrants—Amid increasing capacity and decelerating rates, insurers’ overall sentiment toward the D&O market has shifted. Looking ahead, insurers are poised to fuel further segment growth, as evidenced by several new entrants in the market (e.g., IQUW, Rising Edge, and Inigo) and, subsequently, greater competition. In order to secure market shares, some D&O insurers have broadened their underwriting appetites by quoting additional layers of coverage and undercutting competitors to attract new business.

Cybersecurity concerns—Cyberattacks continue to increase in both cost and frequency, sometimes leading to litigation and related D&O claims. After all, the decisions made by companies’ senior leaders are often intensely scrutinized follow- ing cyberattacks. Potential D&O losses can arise from allegations such as senior leaders failing to take reasonable steps to detect and prevent cyberattacks, report these incidents or notify the appropriate parties. Compounding D&O risks stemming from cyberattacks, the U.S. Securities and Exchange Commission (SEC) proposed changes to its existing cybersecurity disclosure requirements for publicly traded companies on March 9, 2022. These changes include enhanced and standardized rules regarding cybersecurity governance, strategy, risk management, and incident reporting. Going forward, the adoption of these changes could result in further litigation and associated D&O losses for affected companies.

Environmental, social, and governance (ESG) issues—ESG activism has also made a noticeable impact on the D&O market. Specifically, extreme weather events have contributed to a surge in climate change litigation, with many allegations claiming companies and their senior leaders have failed to adequately disclose the material risks of climate change or take action to ensure eco-friendly operations. Adding to these concerns, the SEC proposed changes to its climate change disclosure rules for publicly traded companies on March 21, 2022. Such changes include requiring companies to share further information on their climate-related risks, associated mitigation measures, and greenhouse gas emissions. If adopted, these changes could contribute to increased climate change litigation and subsequent D&O claims for impacted companies.

Tips for Insurance Buyers
  • Examine your D&O insurance program structure and limits alongside your insurance professionals to ensure they are appropriate and take market conditions and trends into account.
  • Keep your senior leadership team actively involved in monitoring workplace cybersecurity threats.
  • Work closely with your senior leadership team and insurance professionals to identify and address any ongoing risks that could lead to D&O losses.

 

This outlook is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2022 Zywave, Inc. All rights reserved.

2022 Midyear Market Outlook: Cyber Insurance

The past year has seen a rapidly hardening cyber insurance market as cyberattacks have surged in both cost and frequency. This increase in attacks has, in turn, resulted in a rise in cyber insurance claims and subsequent underwriting losses. Amid these market conditions, most policyholders experienced higher cyber insurance rates at their 2022 renewals, with many insureds seeing double-digit rate increases. In fact, industry data shows that rates rose by as much as 50%- 100% during the first quarter of the year, depending on policyholders’ specific exposures, loss history, and risk management measures. Insureds have also begun encountering coverage restrictions, further scrutiny from underwriters regarding cybersecurity practices, and exclusions for losses stemming from certain types of cyber incidents—namely, acts of cyberwarfare related to international conflicts and other increasingly prevalent cyberattack methods (e.g., ransomware). Looking ahead, policyholders who fail to adopt proper cybersecurity protocols or experience a rise in cyber-related losses may continue to face rate increases and coverage limitations for the foreseeable future.

Increased nation-state threats and coverage exclusions— Nation-state cyberattacks have become a growing concern over the past year, especially as the ongoing Russia-Ukraine conflict contributes to global cyberwarfare worries. In March 2022, the White House issued a statement warning U.S. organizations that nation-state cybersecurity exposures stemming from Russian attackers would likely increase in the coming months. The federal government also introduced new initiatives to harden the nation’s cyber defenses against foreign threats and urged businesses to follow suit. Apart from elevating their cyber defenses, some insureds have sought coverage for emerging cyber warfare risks. But, these policy-holders have likely faced challenges obtaining such coverage, primarily due to war exclusions, which generally state that damages from “hostile or warlike actions” by a nation-state or its agents won’t receive coverage. Cyber insurance policies are not immune to war exclusions. However, recent court cases and insurance industry shifts have both broadened and narrowed aspects of the scope of war exclusions as they pertain to cyber warfare, creating confusion and posing potential insurance gaps among policyholders.

Elevated ransomware concerns—Ransomware attacks have skyrocketed in recent years, affecting many businesses but especially small- and medium-sized establishments. Yet, ac- cording to industry data, ransomware activity decreased by 20% in the first quarter of 2022 compared to the fourth quarter of 2021. This is likely due to international law enforcement operations disrupting several high-profile ransomware groups since the beginning of the year. Nevertheless, industry data confirmed that ransomware attacks still contributed to 32% of overall cyber-related losses in the first quarter of 2022. Further, costs stemming from ransomware attacks re- main on the rise. According to data from cybersecurity company Palo Alto Networks, the average ransom payment reached $925,162 in the first five months of 2022—up 71% from last year.

Heightened business email compromise (BEC) risks—BEC scams entail a cybercriminal impersonating a legitimate source within an organization to trick their victim into wiring money, sharing sensitive data, or engaging in other compromising activities. These scams are among the most expensive types of social engineering losses, and they have emerged as a major threat. According to the FBI, BEC scams caused more than $43 billion in losses since 2016, with such losses increasing by 65% between 2019 and 2021 alone.

Tips for Insurance Buyers
  • Work with trusted insurance professionals to secure cyber coverage that meets your unique needs.
  • Start the cyber insurance renewal process as early as possible and be prepared to complete supplemental applications regarding your cybersecurity practices.
  • Take advantage of loss control services offered by insurance carriers to strengthen cybersecurity measures.
  • Focus on employee training to prevent cybercrime from affecting your operations.
  • Establish an effective, documented cyber incident response plan to minimize damages amid a cyberattack.

2022 Midyear Market Outlook: Commercial Property Insurance

The commercial property insurance market has hardened in recent years, with consistent rate increases since the third quarter of 2017. These rate increases were evident in the beginning of 2022, with first-quarter rates rising by an average of 7.6%, according to industry data. Similar pricing trends occurred in the reinsurance markets during the same period through moderate, single-digit rate increases for most carriers. Yet, it’s important to note that some insureds may have encountered above-average rate increases, lowered available capacity, and certain coverage restrictions—especially those exposed to catastrophe perils (e.g., hurricanes and wildfires). Looking ahead, policyholders who conduct high-risk operations, have poor loss control practices, or are located in natural disaster-prone areas will likely remain vulnerable to ongoing rate increases and coverage limitations.

 

Developments and Trends to Watch

Natural disasters—The growing frequency and severity of natural disasters have continued to pose concerns across the commercial property insurance market. After all, these catastrophes often leave behind severe property damage and associated losses for affected establishments. According to industry experts, natural disasters cost the global economy

$32 billion in the first quarter of the year, with under half of those expenses ($14 billion) covered by insurers. Such costs are only expected to persist—and even worsen—during the remainder of 2022, largely due to predictions of above-average hurricane and wildfire seasons. Specifically, Colorado State University researchers anticipate 20 named tropical storms to occur in 2022, with 10 becoming hurricanes and five reaching major strength with sustained winds of more than 111 mph. Additionally, the National Interagency Fire Center reported that wildfires have already burned more than 2.6 million acres throughout the West Coast so far this year, nearly doubling the number of acres burned at this time in 2021. Such numbers indicate yet another intense wildfire season in the months ahead. Further, many climate experts estimate that natural disaster trends will continue to exacerbate related losses in the coming years.

Supply chain and inflation issues—The COVID-19 pandemic and various foreign disruptions have contributed to a range of material shortages (e.g., lumber and metal), supply chain issues and inflation concerns within the past few years, thus impacting overall property construction and valuation costs. The first half of the year has seen exceptionally high inflation levels. In fact, as of May 2022, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) had risen 8.6% in the past 12 months, representing a 40-year high. Accord- ing to industry experts, such inflation issues have resulted in property construction costs rising by 10%–15% (depend- ing on local conditions) between 2021 and the beginning of 2022. Compounding concerns, ongoing worker shortages in the construction industry have led to elevated labor costs and project delays. Consequently, policyholders may face more claims severity and possible underinsurance issues if losses require them to rebuild structures or replace business personal property at higher costs. Moving forward, overall inflation issues are expected to continue—potentially keeping property-related losses and subsequent claims costs high for years to come.

 

Tips for Insurance Buyers
  • Determine whether you will need to adjust your business’ retentions or limits to manage costs.
  • Gather as much data as possible regarding your existing risk management Be sure to work with your insurance professionals to present the loss control mea- sures you have in place.
  • Conduct a thorough inspection of your commercial prop- erty and the surrounding area for specific risk manage- ment Implement additional mitigation measures as needed.
  • Develop a documented business continuity plan (BCP) that will help your organization remain operational and minimize damages in the event of an interruption. Test this BCP regularly with various possible Make updates when necessary.

 

 

This outlook is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. 

Factors Driving a Hard Insurance Market and How to Respond

From an insurance buyer’s perspective, it can sometimes feel as if premium prices change on a whim. But the truth is that the insurance market is cyclical in nature, fluctuating between soft and hard markets:

  • Soft markets—A soft market, which is sometimes called a buyer’s market, is characterized by stable premiums, broader terms of coverage, increased capacity, higher available limits and competition among insurance carriers for new business.
  • Hard markets—A hard market, which is sometimes called a seller’s market, is characterized by increased premiums, diminished underwriting appetite and capacity, restricted coverage and less competition among insurance carriers for new business.

While many insurance buyers have enjoyed a soft market for years, the market is hardening. As a result, business leaders now face tough choices regarding their insurance, making it all the more important for them to understand what to expect in a hardening market and how to respond effectively.

Factors Contributing to a Hardening Market

In what was one of the longest soft markets in recent years, businesses across several lines of insurance enjoyed stable premiums and expanded coverage for decades. However, after years of gradual changes, the market is firming, leading to increased premiums and reduced capacity.

A number of different factors affect insurance pricing, but the following are common contributors to the hardening market:

  • Catastrophic losses—Floods, hurricanes, wildfires and similar disasters are increasingly common and devastating. Years of costly disasters like these have compounded losses for insurers, driving up the cost of coverage overall.
  • Claims costs—Claims are increasing in both frequency and severity year over year. One reason for this is that settlement verdicts for bodily injury claims are steadily rising. Attorneys are more inclined to take claims to trial. This extends litigation and significantly raises the cost to defend a claim. Additionally, advances in health care have made treatment more effective, and people are living longer, fuller lives even after a serious accident. While this is a positive trend, it has had an impact on compensatory damages and benefits.
  • Underwriting standards—Insurers are struggling to overcome underwriting losses, especially given how low interest rates have remained in recent times. This has made carriers more cautious, and many are restricting the classes of businesses and lines of insurance they are willing to underwrite.
  • Investment returns—Nearly every insurance carrier uses the funds it receives from premiums to invest in other markets. However, reduced interest rates have negatively impacted profitability, and carriers have a reduced their appetite for risk as a result.
  • Reinsurance—Reinsurance is coverage for insurance companies. Carriers often buy reinsurance for risks they can’t or don’t wish to retain fully. However, reinsurance is becoming more expensive to obtain, which is causing carriers to increase their rates.

What to Expect in Hard Market and How to Respond

Even the most prepared organizations will have to adapt to the hard market, and businesses can expect to face:

  • Higher premiums
  • Increased scrutiny when it comes to underwriting (e.g., underwriters asking for more information regarding a business’s risk and characteristics)
  • Coverage restrictions (e.g., increased retentions) or exclusions
  • Conditional or nonrenewal notices

Put simply, during a hard market, insurance buyers may face difficult decisions regarding their insurance coverage. Thankfully, however, businesses are not without recourse in the face of a hard market. The following are some strategies to consider to help navigate shifts in the market:

  1. Review your insurance program. Above all, check that your policies account for your business’s greatest exposures. An understanding of your coverage ensures you’re not overlooking any exclusions and will help you secure the right policy for your operations. During a hardening market, it may be necessary to make adjustments to your policies. However, those adjustments shouldn’t come at the expense of the coverage you need.  
  2. Bolster your risk management efforts where possible. Doing so makes your business more attractive to insurers. Your broker can also help you review existing policies and procedures, and make suggestions on ways to secure favorable quotes.
  3. Know your loss history. In a hard market, underwriters will be especially critical when reviewing loss trends. Be prepared to explain the factors contributing to a specific loss and the steps you’ve taken to mitigate future losses.
  4. Budget wisely and plan ahead. In some cases, premium increases are unavoidable, and organizations should be prepared. Businesses should budget accordingly and take insurance costs into account alongside their other normal expenses.
  5. Work with the right insurance broker. During a hard insurance market, it’s vital to have a competent insurance professional advising your business. Be sure to partner with a broker that has strong carrier relationships and knowledge of your industry.
  6. Communicate with your broker early and often to determine how the hard market will affect your business. Starting the renewal process early can give your broker more time to secure the best coverage for your business.

Business owners who proactively address risk, control losses and manage exposures will be better prepared for a hardening market than those who do not. Work with your broker now to prepare your business for changes down the road. Contact Lakeview Risk Partners today to get started.