Car, home, and commercial property insurance rates are rising. Some of the most significant increases have occurred for policies that protect a company’s directors and top executives. Some major corporations have retaliated.
Insurers have raised premiums by 100% or more in recent years, as demand for directors and officers policies has risen as a result of a flood of newly public companies and mounting lawsuits with large payouts. Along with coverage limits and higher deductibles, higher prices helped insurers improve their bottom lines.
Businesses must have insurance to protect their directors and officers if they are sued. They would struggle to attract top executives and board members without it.
According to Heidi Lawson, a partner at law firm Cooley LLP, some crypto and technology companies have paid as much as $15 million in annual premiums for $40 million in coverage, or were unable to obtain D&O policies at all. Brokers report that coal-related energy and cannabis companies are also having difficulty obtaining commercial coverage.
Some large corporations are insuring themselves in order to gain more control over their coverage for directors and officers.
Captive insurers add another layer of competition to the market, potentially acting as a price check. To get there, a law change in Delaware, where many large corporations are incorporated, was required to explicitly allow them to use captives for insuring their own directors and officers, subject to some restrictions.
More than 20 large companies contributed to the effort, including Facebook owner Meta Platforms Inc. and biopharmaceutical maker Gilead Sciences Inc. Last year, the state legislature and governor approved the change.
Previously, the law was deafeningly silent on the subject. Concerns were raised that directors and officers insurance provided by a captive could be interpreted as using the company’s own money to settle suits brought against directors and officers for wrongdoing against the company. Delaware law prohibits this for certain types of lawsuits while allowing a company to purchase commercial insurance in general.
Companies are now beginning to tap into those captives. State insurance regulators have given Meta and at least one other company permission to use a captive to provide directors and officers coverage. According to insurance brokers, additional applications are expected.
Companies welcome the new law’s option because they’ve grown tired of being “beholden to the D&O insurance market at whatever price it is,” said Lauri Floresca, a partner at broker Woodruff Sawyer, which works with Meta on its directors and officers insurance arrangements.
Meta declined to specify how much directors and officers insurance its captive will provide. Gilead did not respond to requests for comment.
According to AM Best, directors and officers policies accounted for $14.9 billion in premiums in 2021, a small portion of the $393 billion in commercial insurance premiums in the United States. To protect their board members and top executives, the largest corporations frequently seek policies with potential payouts in the hundreds of millions of dollars.
For the time being, the insurance industry isn’t concerned about losing significant revenue to captive insurers.
Companies may be able to use their captives “as leverage to drive down the rate a little bit,” according to Ellen Charnley, president of Marsh LLC’s captive management business. However, captives are expected to be used sparingly for D&O because “this can be an expensive option,” she said.
According to Charnley, captives are typically fully funded for the amount of D&O coverage they will provide, which ties up capital. She explained that most Marsh clients who use captives for D&O risks do so in conjunction with a commercial policy.
For decades, captives have been used for property insurance and other types of coverage because they are subject to capital, reserving, and other state regulations.
According to the National Association of Insurance Commissioners, 90% of Fortune 500 companies have them.
Directors and officers policy premiums have declined in recent months. This is due in part to a decrease in initial public offerings and special-purpose acquisition companies, or SPAC, activity, which has caused insurers to compete more aggressively for other business, according to Matt McLellan, Marsh’s D&O product leader in the United States.