Actuaries and other professionals from across the industry descended upon Boston to attend the Casualty Actuaries in Reinsurance (CARe) Seminar in June. This annual seminar offered its usual wide variety of session topics — in all there were two general sessions and 35 concurrent sessions from which to choose.
Two of the concurrent sessions, both specific to D&O (re)insurance, generated a fair amount of interactive discussion with in-person and online audiences.
The first session, “D&O — Private and Not-For-Profit Market Update,” was moderated by Lon Chang, an actuary at Ascot Group. Jennifer Bergstrom, a vice president and attorney with Sompo, presented first and provided an overview of current market conditions in the non-public D&O space. She remarked about the soft market conditions in recent years, due in part to new capacity that has, among other things, offered lower retentions. The market is also facing challenges from various elements including global conflicts, inflation pressures and the political environment.
Probability of insolvency is a key consideration in D&O underwriting. The presenter shared data on frequency of insolvencies, demonstrating a rise over the past year or so. Though an increase in claims has not necessarily been seen as a result, this could be a leading indicator that merits monitoring. A review of financials is the best practice, though this is more challenging for private companies as these are sometimes outdated or unaudited or both.
The session also included an update on SEC enforcement. One interesting focus area is “AI washing” — similar in concept to ”greenwashing,” entities sometimes face accusations of exaggerating AI capabilities and making false/unfounded AI-related statements. (An example of greenwashing is a company deliberately misleading the public about its environmental impact.)
Adam Guttin, claims director at Starr Adjustment Services, gave an update on emerging risks with respect to biometrics, beginning with some background.
The market is also facing challenges from various elements including global conflicts, inflation pressures and the political environment.
The Biometric Information Privacy Act (BIPA) was passed in Illinois in 2008, establishing rules around the collection of biometric data by businesses. Informed consent is required prior to collection, and entities are prohibited from profiting from this data. It further provides for a private right of action for individuals, with awards of $1,000 in cases of negligence and $5,000 for intentional or reckless behavior. Of particular note is that no actual harm emanating from this data collection needs to be demonstrated.
BIPA case law has touched upon topics such as statute of limitations, potential coverage under workers’ compensation, and possibility of accrual of claims per scan/collection.
Bergstrom then gave an update on fiduciary exposures in the areas of excessive fee allegations on employee health care plans, counter environmental, social and governance (ESG) litigation with respect to plans investing in ESG funds (versus other assets that could be more profitable) and cyber breaches related to plan participant data.
She then touched upon trends in employment practices liability (EPL), noting that litigation and claims activity have increased back to pre-pandemic levels. EPL claims are particularly vulnerable to social inflation, with the proportion of awards relating to punitive and compensatory damages more than doubling from 32% (2015-2019) to 67% (2019-2023).
The formal presentation wrapped up with a brief discussion about the FTC’s new rules prohibiting non-competes and California’s proposed “Right-to-Disconnect” law.
The second session, titled “Is the Current D&O Market Sustainable?” and moderated by Hannah Huang, contrasted to the first session in that it primarily dealt with public directors and officers insurance.
Brian Sabia, CUO of Toa Re Americas, started by giving an overview of the state of the market. He highlighted the prevalence of price increases in 2019, followed by increasing competition, lower retentions and price decreases in recent years. Sabia also remarked that the market tends to be driven more by primary insurers rather than reinsurers.
Danny Hojnowski, senior vice president at Trans Re, then presented a price index for public D&O. He characterized it as a pure price monitor as no adjustment was made for exposure, increasing market caps and the like. The index shows steady decreases from 2013-2018, followed by marked increase for 2018-2021, and then decreases again in the most recent years. The index differentiates between working versus low/medium excess versus high attaching layers, and in a separate chart between small- versus mid- versus large-cap.
Jennifer Kowall, senior pricing actuary at SCOR Re, shared data on the incidence of securities class action (SCA) activity. She emphasized that Core SCAs have much higher severity than M&A (merger objection) SCAs, and hence focused on these. Core SCA frequency experienced steady increases from 2010-2019 (about 11% per year). Drops in frequency were observed in 2020 (maybe due to COVID) and 2022 (large increase in number of companies, which represents the denominator in the frequency figures), followed by a 7% increase in 2023. She did caution that the data does not account for dismissal rates, which haven’t been published recently.
With respect to severity, Kowall alluded to inconsistent trends, no real social inflation impact and a relatively low incidence of “nuclear verdicts.” She then mentioned the possibility of worsening severity due to factors such as third-party litigation and increasing use of AI by law firms to select cases to pursue.
In summary, there is no shortage of dynamic issues facing this very interesting class of business! Underwriters and actuaries will want to closely monitor emerging risks along with the ever-changing economics impacting D&O (re)insurance.
Robert Blanco, FCAS, MAAA, is the senior pricing actuary at MS Reinsurance. He is a member of the AR Working Group and the Writing Subgroup.
