The directors and officers (D&O) marketplace is at a crossroads. On one side are soft market conditions that have persisted since 2022, creating intense competition among carriers, driving lower pricing and broader terms for insureds. On the other side are macroeconomic headwinds such as inflation, tariffs and a tightening credit market, leading to an uptick in corporate bankruptcies and restructuring.
As these forces collide, savvy brokers are responding by shifting their focus from price to protection. They are using this window to negotiate broader coverage, rather than just lower premiums, for their clients.
History Doesn’t Repeat. It Rhymes.
The current D&O landscape is reminiscent of the cyber insurance market from 2021 – 2023. After those three years of soft conditions, the market hardened fast, leading to double-digit premium increases that caught many insureds off guard.
Could the D&O market have a similar knee-jerk reaction? It’s entirely possible.
Persistent soft markets can create apathy among insureds and underwriters. Businesses that incur six-figure D&O claims and only modest premium increases may begin to feel a false sense of security, believing that financial negligence or regulatory violations will bring few consequences. Carriers, meanwhile, can grow overly permissive in their underwriting practices. They may skip legitimate questions, such as asking about a debt covenant, just to win more business solely on price.
When the market hardens quickly, as we saw with cyber, brokers can get caught in the middle, navigating a tug-of-war between premium spikes for disillusioned clients and tighter underwriting from increasingly wary carriers.
Top Exposures and Exclusions Show the Cracks
Despite favorable terms for insureds in the current D&O market, certain exposures are already causing carriers to tighten their underwriting standards.
A fiercely competitive merger-and-acquisition (M&A) environment is the primary exposure. Over the last few years, we’ve seen privately held companies across multiple industries sell partially or fully to private equity (PE) or move to an employee stock ownership plan (ESOP) model. As companies battle for PE money, the pressure for higher valuations is intense, and boards that overvalue or undervalue their companies face potential D&O claims.
Simultaneously, inflation is shrinking corporate margins, leading to issues with creditors and putting debt covenants at risk. Boards often must respond with creative cost-cutting or risk insolvency or bankruptcy.
Underwriters are responding to these forces with caution. While bankruptcy and solvency exclusions remain rare, antitrust exclusions are emerging in industries like healthcare, driven by concerns about local monopolies or coordinated pricing behavior following an M&A.
Some carriers are also implementing cyber exclusions, which limit protections for board members regarding corporate investments in new IT solutions and in IT risk management initiatives. An emerging subset involves biometric exclusions due to mishandled fingerprint, eye or facial recognition data. Carriers will sometimes bundle a biometric exclusion with a cyber exclusion, creating double exposure for insureds.
Compete on Form, Not Price
These emerging exclusions underscore why chasing the lowest premium can leave insurers dangerously exposed. That’s why brokers should consider leveraging the fierce carrier competition spurred by the soft market to find the most comprehensive coverage for their clients, rather than just the lowest-cost policy.
Such an approach often benefits all parties. Insureds can better manage their risks at a more competitive price. Brokers may receive added protection from potential errors and omissions (E&O) claims. And carriers win quality business and form trusted, secure relationships with brokers.
To see how such a negotiation could work, consider the example of a broker shopping a D&O policy. The broker finds a carrier with room to reduce their client’s premium by $2,000. Instead of taking the full amount as a premium discount, the broker negotiates a $500 premium reduction, then uses the remaining leverage to increase antitrust coverage, raise derivative demand limits, lower retentions, add employed lawyers and soften the bodily injury property damage exclusion. The insured benefits from stronger coverage and cost savings.
Shop Carefully and Broadly
In the race for the best deal, companies may also encourage brokers to shop their policies aggressively in a soft market. Yet switching carriers could put the insured in a worse position, especially for companies with an open claim, and potentially create issues with continuity of coverage if the placement isn’t reviewed thoroughly.
For companies without pending claims, brokers must be thorough when shopping policies. Use benchmarking tools to compare the insureds’ D&O limits with others in their industry. Then be prepared to talk with 20 to 30 carriers to find a policy that removes key exclusions, delivers on price and puts the insured in the most secure position possible.
Brokers should evaluate carriers carefully based on the quality of their claims experience. Niche expertise is another important factor. A broker working on behalf of an insured that has transitioned to an ESOP, for example, should choose a carrier that understands the unique nuances of such structures and can tailor coverage to those distinct needs.
Limit Insureds’ D&O Exposures
In the D&O world, the majority of losses are related to defense costs. An insured can be fully innocent of wrongdoing and still suffer a significant loss. Brokers should educate their clients about this reality and offer these additional tips to reduce D&O-related risks.
Create a diverse board of directors. Encourage companies to be intentional about who sits around the boardroom table. Boards with members who are diverse in gender, race, geography and industry bring unique perspectives, often helping executives find the most innovative solutions to significant business challenges.
Form deep relationships with creditors and vendors. Insureds with long-term creditor relationships are typically better positioned to weather the financial hardships that affect companies during a period of prolonged inflation than those who switch vendors frequently.
Encourage employee feedback. Boards that request feedback when implementing new technologies, policies or procedures – and then make changes based on that input – are positioned to build a culture of transparency that mitigates D&O risks.
Keep Learning and Evolving
Unlike other markets, the D&O space evolves from year to year based on many factors, from inflation and trade policies to stock market volatility and social justice movements. That’s why brokers should stay on top of the latest news and gather information from a variety of sources, including those with opposing views. A well-rounded broker will be best prepared to help insureds protect their business no matter how quickly or drastically the market shifts.
