Companies Advised To Prepare for D&O Renewal Challenges in 2021

Public companies will likely face more difficult directors and officers (D&O) insurance renewals in 2021, so they should be prepared to start the renewal process early and build personal relationships with insurers, according to a recent report from Marsh.

In its Insights report "Rising Insurance Prices and Intensifying Risks: 5 D&O Priorities for 2021," Marsh highlights a number of D&O trends risk professionals should watch closely in the year ahead. They include the following.

• Persistent insurance market challenges—In the third quarter of 2020, D&O pricing for public companies increased more than 50 percent, according to the report, with 90 percent of Marsh clients renewing with rate increases. In addition to higher pricing, public companies also face narrowing coverage, Marsh said.
• Derivative litigation taking center stage—While the COVID-19 pandemic has had some impact on the D&O market, there are other reasons prices are increasing, including the increasing costs of securities litigation, Marsh said. Public companies faced more than 400 securities suits in each of the last 3 calendar years, according to the broker, and are on pace to see 350 this year, according to data from NERA Economic Consulting.
• Continuing environmental, social, and governance (ESG) activism—Shareholder activism remains a significant concern for public companies and their directors and officers, Marsh said. Activists are increasingly focusing on ESG issues, notably demanding that companies prioritize diversity and climate change. Climate change in particular appears to be a continued focus for activists in 2021, according to the report.
• A focus on board diversity—Achieving greater diversity and inclusion within boards has become an important objective of many stakeholders, the Marsh report said, with numerous public companies targeted in securities suits demanding that boards become more diverse. Those actions have typically taken the form of shareholder derivative actions alleging that directors and officers breached fiduciary duties by making false assertions about their commitment to diversity and inclusion.
• More corporate restructuring—Marsh suggested that 2021 will likely be a year of considerable change for many companies, including how they're structured. Those include special purpose acquisition companies (SPACs) seeking to complete reverse mergers with private companies and an increase in 2020 in the number of initial public offerings (IPOs). In addition, corporate bankruptcies are likely to increase in 2021, given continued uncertainty about the economy and the potential pace of economic recovery.

As they prepare for 2021 D&O renewals, Marsh recommended that risk professionals manage expectations for their organizations' senior leaders, set a clear strategy before beginning renewal discussions, involve senior leaders in the negotiation process, and considering different approaches such as changes in deductibles and retentions, limits, and/or insurers.