D&O market will be further inflamed by a Covid-19 vaccine

Nicky Stokes, Head of Management Liability and Financial Institutions, at broker New Dawn Risk, explains that the year ahead is likely to see any respite from the continued pressure on liability rates.

In what has been the most unpredictable year ever, the road for D&O and other management liability classes has been particularly bumpy. In summer 2020 many in our industry had hoped that by the end of the year life would have been returning to “normal”, with the main concern being the ongoing hard market, driven by years of insufficient rates, under-reserving and inadequate retentions.

But Covid-19 was having none of that.  The virus bit back, and a second wave wreaked even more social and economic havoc, leaving a swathe of companies financially weakened, with many still trading under significant restrictions.

With a Covid-19 vaccine finally here, we predict an economic boom in the US – private-sector capital-raising is already at unprecedented levels.  We are seeing an increase in the number of Special Purpose Acquisition Companies (SPACs) or “blank cheque” companies popping up; it feels like anyone and everyone is looking to raise funds.  This will almost certainly lead to bad deals being done in a rush to market.

We are currently seeing a potential for a D&O “double whammy”. On one hand, there will be companies that can’t trade out of the COVID current environment and will go bust. Investors will seek to recoup some of their losses so will chase after directors and officers. On the other, there will be investors that scent an opportunity and, having raised considerable funds, will use that cash to chase after targets. The ensuing rush of acquisitions may result in a flurry of failed deals over the next 12 to 24 months, with further fall out to follow.

Although we expect the hard D&O market to persist for at least 24 months, the scale of rate increases is unlikely to match those we have seen in the past year. The market has seen rate increases north of 100% for some public companies, and we would not expect an insured that has already seen a three digit percentage increase in premium in 2020 experience an adjustment of the same size at the next renewal.

We cannot get away from the fact with rushed deals comes a very high chance of failure, inevitably leading to D&O claims. We predict tough times ahead for clients and brokers who buy D&O in 2021.