Although year-over-year rate increases for Public Company D&O tempered somewhat in the fourth quarter of 2020, the environment remains challenging in the first half of 2021, especially for companies going public.
But new capacity is coming into the market, mostly on the excess side, which could slow the recent surge in follow-on rate hikes, which were growing upwards of 70% of underlying rates, depending on the risk. This multiplier effect was compounding the effect of primary rate increases averaging between 30% and 40%.
"It was that double-whammy that impacted a lot of companies, and there should be a difference this year," said Rodney Choo, Senior VP, Executive Lines, at Risk Placement Services, Inc., in the newly released 2021 Management and Professional Liability Market Outlook. "We are at the tail end of a historically bad hard market. 2021 will be better than 2020, barring another collapse with COVID and the economy."
Underwriters have also started pricing D&O coverage for companies using SPACs-special purpose acquisition companies-to go public similar to that of traditional IPOs, according to Choo.
More than half of all companies going public in 2020 did so through SPACs, and the trend is continuing through the first part of 2021. SPACs are public companies that exist for the sole purpose of acquiring another company or companies-often referred to as a de-SPAC transaction. SPACs have recently begun raising additional capital through the use of PIPEs-private investment in a public entity-to help fund larger deals.
"The use of PIPEs has implications from a securities law perspective, and it adds a level of underwriting complexity to what are already often complex transactions," Choo explained. "Combine that with greater SEC scrutiny, some recent high-profile de-SPAC securities cases, and the sheer volume of deals in the market right now, and it is not surprising that we're seeing rates and retentions go up for all parties involved, from the initial SPAC IPO to the de-SPAC go-forward program."
The Public Company D&O market has also been impacted by the rise of state-level Section 11 cases, especially in Northern California, which caused a significant increase in litigation and settlement costs for carriers. Typically, Section 11 cases should be filed in federal court, but some industrious plaintiffs' attorneys were filing in both forums, spiking legal costs. In some cases, carriers were shelling out a full $10 million in limits for which they charged premiums as low as $40,000 to $50,000 on an excess layer.
"We saw a significant increase in overall costs to litigate and settle these matters, and that doesn't even begin to touch on the fact that many of these cases should likely have been dismissed outright," Choo said. "That just wasn't sustainable."
The issue made its way to the U.S. Supreme Court in Cyan Inc. v. Beaver County Employees Retirement Fund, but the only way to truly resolve the issue is for Congress to address it in legislation. In the meantime, many D&O industry experts are hoping courts will follow a recent Delaware Supreme Court ruling in Salzberg v. Sciabacucchi upholding the use of the "federal forum provision" in Section 11 cases.
To mitigate their D&O insurance costs, Choo advises retail agents and brokers placing coverage on behalf of clients planning to go public, whether through IPOs or de-SPACs, to consider buying only Side A coverage, which protects a corporation's directors and officers when the company cannot indemnify the individuals, and self-insure Sides B & C, also known as "entity coverage."
RPS stands ready to help retailers navigate today's turbulent Management and Professional Liability Market by serving as their outsourced placement team. As a wholesaler, RPS has longstanding relationships with underwriters in the E&S market, as well as the expertise needed to educate agents 'and brokers' internal teams, as well as their insureds.