Will the D&O market conditions remain favorable? Allianz report says 2024 will bring its share of challenges.

Several global challenges pose a significant threat to maintaining soft market conditions for Directors and Officers (D&O) liability coverage, according to the most recent report on the sector by Allianz.

A list of salient risks and trends to monitor during 2024 spans various areas, including:

Macroeconomics, Geopolitical, Generative AI (GenAI), Environmental, Social, and Governance (ESG), and Class action filings and third-party litigation funding.

According to the latest edition of Directors and Officers Insurance Insights, any of these factors could change the outlook for a competitive market this year.

The D&O market may have mostly avoided the bumps and scrapes faced by other lines of coverage in 2023. With double-digit decreases in insurance pricing worldwide, new market entrants, favorable loss ratios, and a reduction in the Initial Public Offerings (IPOs), the environment contrasts sharply with the early pandemic years of 2020 and 2021. Over 90 percent of D&O underwriters (in a separate study) expected pricing to decrease or stay the same for mature public companies in 2024.

However, Allianz (in conjunction with Munich Re) predicted business insolvencies may rise by 10 percent in 2024. In today’s dynamic environment, organizations — from startups to multi-national behemoths — may rely on D&O policies to manage liabilities arising from executive leadership decisions. Having coverage in place signifies attention to the bottom line and removes a barrier to recruiting the best leadership talent.

The 2023 economy delivered many hurdles, particularly in rising costs and interest rates, rendering the effective management of capital expenditure[DJ1]   and debt a cryptic challenge for organizations and their executives. Add to that mix insolvency activity that is starting to look similar to what followed the 2009 global financial crisis. The “likelihood of a recession in the US and UK continues to rise in 2024,” the report says.

Citing Fitch’s analysis, the report warns of threats to future profitability from “weaker pricing and the potential claims volatility from a myriad of sources.” Still, Allianz suggests that reserves from most recent years may safeguard “near-term underwriting results.”

The early 2023 banking crisis is expected to leave a mark on the D&O segment as each of the bank failures and near failures – widely attributed to substandard banking practices – resulted in a securities fraud claim. The forecasted multi-billion dollar losses in market cap and final disclosure pose an enormous threat to insurance towers, the layers of coverage spreading risk across multiple insurers and coverage levels to diversify overall risk exposure. Consequently, the report advises closely monitoring banks with large commercial property portfolios and how the Treasury plans to rebuild its cash balance from the lowest level in seven years.

The report discusses how technology advancements offer a mixed bag for the D&O segment, creating advantages for organizational efficiency and productivity but also new risks surrounding cybersecurity, regulatory requirements, transparency and governance, litigation, and investor expectations. Cybersecurity, in general, has been on the radar for several years now. However Generative AI (GenAI), a relatively new technology in the risk management spotlight, could enable more threats for cyber risk management.

Separately, Gen AI has already sparked intellectual property and privacy claims. Future claims could emerge in securities, breach of fiduciary, shareholder, and derivative lawsuits. The report states that managing risks posed by Gen AI requires the cultivation of expertise-driven best practices and protocols.

Another 21st-century issue, Environmental, Social, and Governance (ESG), appears to have permanently taken root as a factor in the D&O risk landscape. Despite the ongoing debate over its value, definition, and measurement, the ESG framework encompasses a growing list of conundrums faced by directors and officers. Organizations don’t operate in a vacuum but in communities where human rights, climate risk, and other ESG concerns can infiltrate business-as-usual operations. Tactics that avoid or incur costly regulatory sanctions can also spark lawsuits from private stakeholders.

“In a world that is becoming increasingly polarized politically and socially, the very need for directors to evaluate and address the impact of various ESG factors on corporate value creates that claims will be made…on either or both sides of any given issue,” the report states.

The specter of increased litigation costs persists as federal securities class actions climbed to 201 by early December in 2023 (up from 197 in 2022) and total settlement dollars outpaced historical levels. Figures for only the first half of 2023 exceeded the total for 2022, climbing to a ten-year record high.

The D&O segment has always been dynamic, and claims can arise from various sources, including shareholders, employees, regulatory agencies, competitors, and customers. Therefore, the product continues to play a vital role in mitigating the risks associated with corporate governance and protecting the interests of directors, officers, and the companies they serve. Overall, the market’s future will remain competitive as established insurers move to address underwriting challenges, but it’s not likely that the 2024 environment will be hospitable to new insurers lacking a substantial portfolio.