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February 28, 2024

D&O Insurance Market Update

Any period of volatility involves both ups and downs. The D&O insurance market has experienced major price fluctuations in recent years. 2019 and 2020 saw rising rates, but now rates are falling. However, recent trends in securities class action risk could lead to additional volatility in the future.

What Goes Up Must Come Down

D&O prices jumped by 16.8% in the first quarter of 2020, according to CIAB. Price hikes remained in the double digits every quarter for a period of about two years, before dropping to 7.8% in the first quarter of 2022. In the third quarter of 2023, prices declined for the first time since 2017. The decrease was modest – just 0.3% on average – but that’s a far cry from the price increases of just a couple of years earlier.

In a panel sponsored by the NACD Northern California Chapter, Joseph Talmadge, Senior Vice President at Heffernan Insurance Brokers, discussed some of the causes behind the recent D&O market volatility with Patrick Gibbs, Partner and Head of Securities Litigation & Enforcement Group at Cooley LLC, and Christine Gorjanc, a Board of Director at Shapeways, Carbon Health, Invitae, and Juniper Networks Inc.

Patrick identified two main factors behind the volatility: trends in securities class action litigation and developments in the scope of fiduciary duties. Christine noted the rise of compounding risks (including cyber and supply chain risks) that board members need to oversee. ESG exposures are another growing area of concern, with some carriers adding ESG enhancements to their policies.

2023 Securities Class Action Litigation Trends

Although securities class action litigation is far from the only issue influencing the D&O insurance market, it is a major factor. Therefore, to see what may lie ahead in the D&O market, it makes sense to look at recent developments in securities class action filings.

According to the 2023 Year in Review Securities Class Action Filings report from Cornerstone Research, overall filing volume increased from 208 in 2022 to 215 in 2023. The number of core filings (which excludes M&A filings) also increased.

The 2023 Full-Year Review Recent Trends in Securities Class Action Litigation from NERA also shows an increase in federal securities class action lawsuits in 2023. The report says there were 228 new federal securities class action suits filed in 2023. Notably, this is the first increase since 2019.

Although the increase in total filings was small, Cornerstone Research shows that the types of filings shifted dramatically. The combined number of federal Section 11 and state 1933 Act filings actually decreased by 62% – from 50 in 2022 to only 19 in 2023. However, the number of other federal filings increased from 151 in 2022 to 190 in 2023, which resulted in the overall increase.

There has also been a shift in which industries are seeing the greatest impact of securities filings. The Cornerstone Research report shows that the percentage of S&P 500 companies in the consumer staples sector that experienced a core federal filing increased to 10.5% in 2023, whereas the percentage of communications, telecommunications, and IT companies increased to 11.6%. The utilities sector was the only sector to see a decline.

Factors Driving Securities Class Action Activity

The report from Cornerstone Research shows that, even though total filing volume was up, core SPAC filings, cryptocurrency-related filings, and COVID-19-related filings all fell in 2023.

The NERA report points to violations of Rule 10b-5 v, which prohibits securities fraud, as the main driver behind the uptick in securities class action activity. The turmoil that occurred in the banking industry in 2023 played a significant role: the number of filings in the finance sector doubled in 2023 and comprised 18% of all new filings. Environmental issues were another major factor, with the number of environment-related filings quadrupling between 2022 and 2023.

What’s in Store for the D&O Market in 2024?

At the start of 2024, the D&O market is fairly soft. However, the increase in securities class action activity could signal a harder market ahead. The same factors that contributed to increased filings – namely financial disruption and ESG concerns – could impact D&O coverage.

To keep up with changes in the D&O market, contact Joe Talmadge.

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