The financial press has been filled with headlines lately about the cold shoulder that investors are giving IPO candidates.
Investors, we know, aren’t in love with red ink, staggering debt loads or weak corporate governance.
As it turns out, neither are insurance companies, which explains why entities going public have seen rates and retentions rising dramatically for policies that help protect them against lawsuits alleging they misled investors.
Specifically, we’re talking about Directors and Officers insurance, which covers suits arising from securities fraud in connection with public and private placements as well as claims over failure to comply with regulations.
The Directors and Officers market for companies conducting IPOs is now the hardest we’ve seen since the early 1990s.
Companies that have experienced significant growth, claims, material increases in risk profile or that participate in areas that are perceived to be risky – such as life sciences, cryptocurrency, cannabis and some areas of the technology space – are seeing some of the most significant increases in premium and retentions.
In part, all of this is related to a 2018 U.S. Supreme Court decision that allows some securities lawsuits to move forward in state court in addition to federal court.
Companies prefer to fight such lawsuits in U.S. court because federal judges have more experience with the laws that govern IPOs. With help from overly aggressive securities lawyers, investors are quicker than ever to pounce when a newly issued stock fails to live up to expectations. The so-called Cyan decision made their job easier.
According to Reuters, 25 lawsuits related to IPOs have been filed so far this year against 19 companies. Six companies that launched IPOs face suits in both state and federal court.
Poorly performing IPOs, it’s worth noting, aren’t alone in driving up D&O rates. Cyber security mismanagement and sexual harassment cases also are fueling the trend.
All of those lawsuits mean that insurers face the potential of paying tens of millions of dollars in defense costs and settlements.
Resenting carriers for their rate increases won’t do us much good. For a growing number of them, their D&O business is pretty much under water.
Rates, not surprisingly, are up for virtually every Directors & Officers risk. We’ve seen increases ranging from the high single digits to the mid-20s, depending on the carrier. Some have gone even higher.
Worse still for buyers, rates have been climbing in a number of other coverage areas at the same time, with increases in property, casualty and financial and professional liability insurance.
Global pricing composites show commercial insurance rates began rising in late 2017 with no sign of slowing in any quarter since. Indeed, the second quarter of this year saw one of the sharpest spikes in years.
According to one leading composite, financial and professional liability rates in the U.S. alone increased by 7% in the second quarter, driven in large part by increases in Directors & Officers rates.
Carriers, again, aren’t merely raising their rates.
They’re also lowering coverage limits for “harder” risks and requiring companies that go public to assume higher retentions, leaving them to pick up a bigger percentage of the cost of resolving a lawsuit before their policy kicks in.
Exactly when things might turn isn’t clear, but it’s fair to say this trend will continue over the next 18 to 24 months.
Practically speaking, companies considering going public or weighing follow-on offerings need to think hard about the potential for lawsuits in less-sophisticated venues when considering how much D&O coverage to purchase.
Finding the right carrier can be tricky, too. Their policies can vary widely and it’s important to remember that an insurer’s financial strength today may change significantly in the three or more years it can take to resolve claims.
Challenging times, right?
Andrew Mahoney is an Executive Vice President at CCIG. Reach him at Andrew.Mahoney@thinkccig.com or 720-330-7925.
CCIG is a Denver-area insurance, employee benefits and surety brokerage with clients nationwide. We do more than make sure you have the right policy. We help you manage your long-term cost of insurance with our risk and claims management expertise and a commitment to service excellence.