Insurance Companies Raise Rates Despite Backlash

Insurance rates have increased for cars, homes and commercial property. Some of the biggest increases have been for policies that protect a company’s directors and top executives.

Some large businesses have taken action in response to the new regulations.

As the demand for directors and officers insurance policies has increased in recent years, insurers have responded by raising premiums by 100% or more. This has been driven by a wave of newly public companies and mounting lawsuits with large payouts. Higher prices have helped insurers to improve their bottom lines, alongside restrictions on coverage amounts and higher deductibles.

Insurance that protects directors and officers from lawsuits is essential for businesses. Without it, they would struggle to recruit top executives and board members.

Some crypto and technology companies have had to pay extremely high annual premiums for $40 million of coverage, or have been unable to get D&O policies at all, according to Heidi Lawson, a partner at law firm Cooley LLP. Brokers have said that coal-related-energy and cannabis companies are also finding it difficult to get commercial coverage.

Some large companies are insuring themselves to get more control over their coverage for directors and officers.

The ability for companies to insure their own directors and officers through captive insurers brings an added element of competition to the market, potentially acting as a check on prices. In order to make this possible, Delaware had to change its laws to explicitly allow for this type of insurance, with some restrictions.

The effort was the work of more than 20 large companies, including Facebook.

Meta Platforms Inc. and Gilead Sciences Inc. are both biopharmaceutical companies. Gilead Sciences Inc. is the owner of Meta Platforms Inc.

The state legislature and governor approved a change last year.

Previously, the law was silent on the subject of directors and officers insurance. A concern was that directors and officers insurance provided through a captive could be construed as using the company’s own money to resolve suits brought against directors and officers for wrongdoing against the company. Delaware’s law prohibited that for certain types of lawsuits, while generally allowing a company to purchase commercial insurance.

Now, companies are beginning to use captives to provide coverage for their directors and officers. State insurance regulators have approved plans for Meta and at least one other company to use a captive to provide this type of coverage. Other applications are anticipated, according to insurance brokers.

The recent change in the law has been welcomed by companies, who have been unhappy with being at the mercy of the D&O insurance market. Lauri Floresca, a partner at broker Woodruff Sawyer, which works with Meta on its directors and officers insurance arrangements, said that the new law provides a much-needed option for companies.

Meta Insurance Company declined to provide details about exactly how much directors and officers insurance its captive will provide. Gilead Corporation declined to comment.

Directors and officers insurance policies accounted for $14.9 billion in premiums in 2021, a small slice of the $393 billion in total commercial insurance premiums in the United States, according to ratings firm AM Best. The biggest companies often want policies with potential payouts in the hundreds of millions of dollars to protect their board members and top executives.

The insurance industry doesn't seem too worried about losing revenue from captive insurers for the time being.

According to Ellen Charnley, president of insurance broker Marsh LLC’s captive management business, companies may be able to use their captives to negotiate lower rates for D&O insurance. However, she cautioned that this option can be expensive and is not likely to be used extensively.

She said that captives are typically fully funded for the specified amount of D&O coverage they will provide, which ties up capital. Marsh clients who are using captives for their D&O risks usually do so in combination with a commercial policy.

Captives have been used for property insurance and other types of coverage for decades. According to the National Association of Insurance Commissioners, about 90% of Fortune 500 companies have them.

Directors and officers policy premiums have decreased in recent months. This is partly due to a decrease in initial public offerings and special-purpose acquisition companies, or SPAC, activity. This has led insurers to compete more aggressively for other business, said Matt McLellan, D&O product leader for Marsh in the U.S.