With the passing of the JOBS Act and the possible impact it may have on Directors & Officers insurance, in addition to headlines involving several high-profile cases, we wanted to discuss some of the issues being raised involving the D&O space. We reached out to our storefront, NSM Insurance Group, a market leader in the development and implementation of industry-specific insurance programs, including professional liability.
We spoke to Brian DeGraw, Program Director for NSM Insurance Group’s Professional Liability Division, which focuses on vertical markets including Allied Healthcare, Independent Insurance Agents, CPAs, Lawyers and Dentists under the brand AFPD Insurance for Professionals. Brian has a Bachelors of Science degree in Marketing from Cabrini College and several insurance industry designations including RPLU, CIC, CPCU 510, 520, and is a Property and Casualty licensed producer.
Annie George (AG): Let’s first discuss the state of the D&O market and where it’s at in terms of pricing, profitability, underwriting, etc.
Brian DeGraw (BD): “Over the last five years there has been a serious deterioration in underwriting profit for D&O carriers. Although other lines of business have begun seeing rates firm, the D&O market is still in the midst of a soft market that began 10 years ago. There is as much pressure to get business in the door and bound as there is to obtain profitable business – and typically revenue wins. Underwriters have a lot of pressure on them.
“What’s more, fewer carriers are paying the attention needed regarding the issues that we’re about to discuss, which ultimately affect their underwriting performance and what they should be doing about it. Their attention is focused on being more competitive on top-line growth.”
AG: If indeed we’re seeing major losses such as those making headline news, I would think that underwriting would become tighter, and the market would eventually begin to firm up.
BD: “You have to keep in mind supply and demand. Unfortunately, with this economy more companies have closed their doors, stopped hiring, and laid off employees. As a result, there are fewer buyers of insurance. Although there have been poor results, specifically for longer-term players in the D&O market, there is a lot of pressure on investors to diversify what they are doing in other markets; there’s also a desire for new carriers to start writing business, and for existing carriers to expand their programs or get into programs that they view as untapped areas for their companies. This has created a significant amount of capacity. Furthermore, there are too many outside factors and pressure that don’t allow intuitive decisions to happen, such as raising prices due to poor results.”
AG: “In the last few months, there’s been discussion about the JOBS Act and the impact it may have on D&O insurance as it relates to start-ups. Some of the issues raised include narrower disclosure obligations for start-ups (emerging growth companies) and whether this will affect an increase or decrease in claims or impact premiums or underwriting acceptance. Do you see the new regulations affecting the D&O market, the underwriting process?
BD: “The JOBS Act, designed to jump-start business, may or may not play an important role in the current market conditions specific to D&O Liability. But, before we can answer the question as to whether the new rules will affect the D&O market, you have to go back again to the issue of supply and demand.
“There is simply too much supply and not enough demand. Therefore, there will be less pressure for insurance carriers to react appropriately to less legislation or diminished regulatory governance by changing the way they underwrite risks than there should be. Because there continues to be suppressed pricing, which is out of balance with underwriting results, the likelihood that any regulatory changes will have an immediate, sudden impact on the market is slim to none.
“With this said, eliminating certain limitations under the JOBS Act that were in place under Sarbanes Oxley, such as the reporting and audit requirement for emerging growth companies, will likely bring challenges to the underwriting process when it comes to obtaining more insight into these types of risks. This generally would mean accepting fewer opportunities prior to the introduction of the Act.
“Yet, you also have to look at the SEC, which plays a significant role in all of this as well. What rules will they put in place around the Act so that insurance carriers and their underwriters can make some decisions, and how will these rules impact the carriers’ portfolio? The SEC is already struggling to adapt certain rules around Dodd-Frank. The JOBS Act is just one more area where the SEC will find itself in a conundrum to react quickly, with underwriters waiting to see what comes of this so that they can make the appropriate changes, assuming they want to make those changes. This will take some time. Furthermore, once the rules are established, more time will be needed for state filings and so on by the carriers.”
AG: There are many high-profile cases in the news involving suits against management and their directors and officers. Do these cases reflect a trend?
BD: “I don’t see these high-profile incidents as a trend. Ten years ago it was Adelphi and Enron, for example. Fifty years ago, it may have been big-steel companies involved in mismanagement. I do believe though that more individuals are getting caught. The challenge for underwriters is how to ‘sniff out’ the companies that have the potential for creating exposures based on the information you are provided. The underwriter’s decision is only as good as the information that is provided.
“Even if there were fewer regulatory requirements (which goes back to the JOBS Act), this doesn’t mean that an underwriter is absolved from gathering information about the risk in front of him or her. Simply because there are watered-down regulations or fewer requirements doesn’t mean you shouldn’t still be probing to get the same amount of information to assess a risk. The regulation simply means that everyone plays by the same rules; it should be clear what the requirements are, and then, as an insurer, you can draft your coverage language based upon those regulations.”
AG: What type of risk-mitigation measures would you recommend for corporations/firms to help stem these types of losses?
BD: “It’s not a novel approach, but for a company to be a good risk, to get the best D&O pricing, coverage, and terms, leadership has to do the right thing. Make sure the tone of the company is right – from your hiring practices to your business growth. And this culture, this tone has to begin at the top with company leadership. Good underwriters get on the phone with the leadership of an organization, ask the right questions. They will ask about the company’s inherent practices –what controls are in place for oversight, what is the leadership like, what is the leadership’s experience? All of these things play a critical part for a company to be successful – or not to be sued.
“If you’re fortunate to grow your business in this economic market, take your fiduciary responsibility seriously. Avoid conflicts of interest when you’re asked to sit on the board, and if you do agree to take that responsibility, make sure you’re getting involved and staying involved. D&O underwriters do look at this.
“The bottom line: A good risk starts with good leaders that focus as much on training and development as they do on profitability.”
NSM Insurance Group is a national commercial property and casualty Program Administrator with underwriting expertise in specific industries and lines of business. For more than 35 years, NSM Insurance Group’s size and national scope have helped the firm establish and maintain strong relationships and partnerships with a wide range of the industry’s top-rated carriers and independent agencies. Its market clout provides strong financial backing, comprehensive coverages and greater market potential to meet each client’s unique needs.