Risk Adviser
Buckle Up

• Kara Altenbaumer-Price
• March 2019
• 

After years of falling prices, several trends and one critical Supreme Court case have the public directors and officers market bracing for change.

The U.S. Supreme Court's March 2018 decision in Cyan v. Beaver County Employees Retirement Fund ushered in a hard D&O insurance market for new initial public offerings. Within weeks, premiums and retention levels rose dramatically for companies seeking to purchase their first public D&O insurance program. It appears the Cyan decision's effect on the market may not be confined to IPOs; it was also the excuse the market sought to reverse a decade of soft market conditions.

As early as 2017, public companies could no longer expect an annual decrease in their premiums. Insureds began to see their D&O insurance rates flatten. Then, in 2018, many companies saw single-digit increases in the primary or first excess D&O layer. However, rate decreases in the high excess layers allowed those with large towers to keep their overall premium relatively flat. Smaller cap companies and harder-to-place industries or those with struggling balance sheets saw their rates rise even more in 2018, with some experiencing increases between 10% and 20%.

A number of factors led to this point. Securities litigation is up, with the number of filings hitting an all-time record in 2017. While 2018 looks on pace to be slightly lower, it still represents a 10% increase over the 10-year average. Considering the fact that public companies number less than half of what they did a decade ago, the chances of an individual company getting sued is very high. Indeed, one in 15—or 6.4% of all S&P 500 companies were sued in 2017. With a smaller pool of companies to absorb the premium dollars associated with increasing risk, carrier profits also have been declining. Rates were bound to go up and, then, the Court issued its Cyan ruling.

The Cyan decision resolved a longtime circuit split over whether securities class action cases arising from IPOs can be brought only in federal court or in both state and federal court. The court decided that the law allowed cases to be brought in state court in every jurisdiction. While the decision may seem like an arcane point of legal procedure, it has a very significant impact on the likelihood—and more importantly—the cost of a securities class action following an IPO. Motions to dismiss are far easier to survive in state court and, more importantly, discovery is allowed in state court while the motion to dismiss is pending. These two factors are expected to dramatically increase the cost of IPO litigation, and with approximately 20% of all new public companies getting sued during their first five years, carriers are increasingly concerned.

In recent IPO towers built for companies going public in the fourth quarter of 2018, some carriers that had traditionally competed for the coveted primary slot for new public companies pulled out of the primary market altogether. Most carriers are unwilling to consider more than $5 million in capacity on an IPO tower, and many carriers are only willing to attach above $10 million. Rates per million dollars of coverage were quoted as high as $100,000, even on some low excess layers. Perhaps, most shocking, is the dramatic increase in retentions; some carriers are now requiring retentions of $5 million or more on IPOs.

This hard market is unlikely to be confined to new public companies. The trends of 2017 and 2018 have already laid the foundation for a hardening market. Cyan only cemented it.