Directors’ & Officers’ Liability (D&O)
The D&O market has continued to soften, and has had an increasingly more favourable approach towards "green" energy companies, from energy producers to power distribution, project finance, IPOs and construction of such projects. This is due to an increased push from capacity providers, reinsurers and institutional investors on insurers to increase their "green" credentials.
At the same time, the same stakeholders also impose strict capacity and coverage restrictions on exposure to non-renewables, particularly on coal and oil and gas.
Here is a summary of how market dynamics have shifted:
Competition on rates has been somewhat balanced by “rate stabilisation” efforts from insurers, however, there has been an increase in rate reductions. Partly due to insurers looking to recoup revenue losses on their renewal book, which has led them to be more aggressive when quoting for new business.
Primary layers (and lower excess layers) saw more stable rate activity compared to higher excess layers where double digit rate reductions were common.
There are no major changes in terms of active insurers operating in the London D&O market, however, increased appetite has led to additional available capacity. While many insurers are still challenged by their self-imposed (or Lloyds imposed) ESG related capacity restrictions, the London market is almost back to the same capacity levels available for large D&O programmes seen in 2019.
D&O insurers are increasingly quoting for primary layers and “bundling” them with quotes for additional lines of business (Crime / PTL / EPL) to increase client retention.
We also saw long term / multi-year options offered selectively to clients with a stable business model and financial outlook. Insurers have also been more willing to negotiate retention levels and have been offering broader cover to balance rate reductions.
US-listed companies remain more challenging for many insurers compared to the rest of their portfolio due to increased numbers of SCA filings, with emerging trends for crypto and SPAC related claims. And we have seen increased levels of underwriting diligence for companies with exposure to high geopolitical risk.
We have delivered premium savings and coverage enhancements for our clients while continuing to build long term and sustainable relationships between them and the insurers.
Emerging risks
Securities class actions
In 2024, several securities class action suits were initiated in the US including the below:
- More securities class action filings: 222 filings were made in 2024 compared to 213 in 2023. This is an indicator of potential increase in claims frequency.
- 11 filings related to Energy and one related to the Utilities sector. Ref: Stanford Law, SCA Clearing House (& Cornerstone Research)
- Bigger securities class action settlements dominated 2024
These stats need to be analysed with caution. Firstly, not all filings result in big settlements or a seismic and exemplary judgement. Nevertheless, even achieving a motion to dismiss, the company and its directors can accumulate millions of dollars in defence costs. Any case that survives the motion to dismiss, would take several years to reach settlement or final judgement. The impact of these costs on D&O policies and insurers would always have an impact on the market.
ESG
According to a report by Harvard Law, ESG activism continued to rise in H12024. “Activists continue to promote ESG objectives through litigation and corporate governance structures, and corporates are taking pre-emptive measures. Lawmakers, regulators and big energy companies were challenged by activist shareholders, NGOs, climate activist, and even the European Court of Human Rights (EctHR) across continental Europe. They aim to encourage (if not pressure) the companies to commit to measurable and impactful “green” targets and keep them honest about their progress and not exaggerate their credentials (i.e. green washing).On the other hand, there has been backlash against increased disclosure demands from stakeholders and regulators by industry leaders, consumer groups and policymakers. Such backlash is expected to be successful in the US under the new Trump administration as they have been openly vocal in their criticism of the green energy transformation. In early 2025, the European Commission proposed an Omnibus package to its EU Corporate Sustainability Reporting Directive (CSRD), which aimed at streamlining and simplifying the reporting and due diligence requirements. The Omnibus introduced new implementation dates and thresholds, which would potentially remove 80% of companies from the scope of CSRD.
Shareholder activism
Lazard’s 2024 report on shareholder activism noted key data and trends in shareholder activism activity in 2024. Lazard reported: “The global activist universe expanded in 2024 with a record 186 investors launching campaigns, with first-time activists representing 47% of all activists and 32% of campaigns”.
Dealing with activist demands takes a lot of management time and focus away from day-to-day activities. Companies may need to appoint crisis management / PR firms to deal with activists in the first instance. Depending on the scope of the demands, companies' legal counsel and mediators can also be involved. In the event of a big fall out between the company and the activist shareholders, the company may be pushed to a restructure, sale or merger, and may face a share price drop – if publicly traded.
Shareholder activism activity:
186 investors launched campaigns in 2024
47% first-time activists
32% campaigns
The Omnibus introduced new implementation dates and thresholds, which would potentially remove 80% of companies from the scope of CSRD.
Defence cost inflation
Neither D&O policy premiums nor limits are catching up with the rate of defence cost inflation. PWC UK Law Firms Survey 2024 presented that, in contrast to 5.2% average inflation (UK, April 2024), the rate per chargeable hour increased between 3.7% to 6.9% depending on the tier of the law firm. On average, rates have increased by 25% since 2019 across all tiers. Insurers are reporting that D&O claims are getting more complex and taking longer to resolve. The underlying claims costs (investigations costs, defence costs, etc) continue to accumulate during such period.
This is concerning both for insureds and insurers. Buyers are concerned about not having sufficient limits to cover the damages or settlements at resolution. Insurers are also growing concerned about rate adequacy, reserves, long term profitability and therefore pushing for rate stabilisation.
On average, rates have increased by 25% since 2019 across all tiers
PWC UK Law Firms Survey 2024 presented that, in contrast to 5.2% average inflation (UK, April 2024), the rate per chargeable hour increased between 3.7% to 6.9% depending on the tier of the law firm.
Litigation funding
Despite criticisms, litigation funding continues to increase, and there is a positive correlation with claim frequencies which is concerning for insurers.
Litigations algorithms, used by funders, tend to focus on contentious securities claims and major corporate scandals due to the potential of big pay-outs. Although we have seen a less discriminative approach in recent years, this may lead to increased frequency in claims of this nature and a further increase in defence costs.
A global heat map on use of Litigation funding (ref: Litigation Funding report co-authored by Allianz and Clyde & Co) shows the countries risk profile (low-medium-high) “for collective actions and the impact of Litigation funding”.
New US Administration and Trump 2.0
The new Trump administration has been openly vocal about easing regulation of the US market to release the “stress” on corporates with the aim to boost economic activity. Among the concepts they openly criticized are DE&I, Cyber and ESG.
It is difficult to comment how this shift will exactly impact the D&O market. Less regulatory scrutiny may put the brakes on investigations and enforcement actions. On the other hand, lack of guidance could lead to lax governance standards which may lead to further claims in the future.
The new Trump administration has been openly vocal about easing regulation of the US market to release the “stress” on corporates with the aim to boost economic activity.
Market outlook for 2025
We expect to see a more stable rate environment moving through 2025. As the year progresses, we expect to see a larger divergence between the insurers which stood firm against softening conditions and those that are pressured to meet their toplines.
The current soft conditions make it challenging for any new capacity providers to enter the market, unless an existing insurer is expanding its product or territorial capabilities. Existing insurers are getting more relaxed around capacity deployment in terms of attachment levels and total capacity being offered. But they remain conscious of monitoring total capacity at risk across D&O, SIDE A DIC layers, other Management Liability products and AOC and reinstatements.