The 2023 Outlook for the D&O Market

April 3, 2023

Directors and officers insurance, known as D&O, is intended to protect high-level employees against personal loss in the case of a lawsuit that arises in the scope of their leadership positions in their business or organization.

What is to Come for the D&O Market

The D&O market outlook in 2023 is uncertain due to challenging economic conditions and transitioning rates on the cusp of a possible recession. Still, there are several emerging trends to watch.

Securities Class Action suits

Between 2017 and 2019, the insurance market saw a record number of Securities Class Action lawsuits (SCAs), with over 400 per year primarily resulting from merger objection lawsuits. SCAs are considered an important metric in determining rates for the D&O market, so when they increase in severity and volume, the D&O rates also tend to rise. Over the past five years, the premiums for D&O policies have been extremely high. However, in 2022 the SCA level dropped to 196, which is beneath the 30-year average, which points to some possible stabilizing of D&O rates in the coming year.

Cyber Risk Management

Cybersecurity issues are now seen as a critical part of the responsibility of business leaders. Cybercrime has escalated in severity and frequency over the last several years, with predictions to cost around $10.5 trillion annually by 2025. Boards of directors and top-level organizational executives are expected to create protections against cybercrime and remain accountable for IT security during all the phases of a cyber incident. Failure to do so can be seen as a failure to meet expectations that could result in a lawsuit. As the number of cyber attacks grows, so does the likelihood of lawsuits related to directors and officers not providing adequate leadership to combat the issue.

Environmental, Social, and Governance (ESG)

The possibility of litigation related to ESG issues is a significant concern for boards of directors. Climate change lawsuits have steadily increased, with more than 1,200 international cases filed over the past eight years. The D&O market has always been sensitive to the governance part of ESG, but environmental and social issues are now vital areas as well. 

IPSOs and SPACs

In 2020 and 2021, there was a significant uptick in special purpose acquisition companies (SPACs) and new initial public offerings (IPOs). This encouraged dozens of new companies to enter the D&O market. However, a steep decline in SPACs and IPOs in 2022 forced these newer companies to lower their D&O premiums to stay competitive, encouraging other providers to follow suit. This increased competition has influenced the D&O market by driving down the cost of premiums.

Additional Concerns for the D&O Market Outlook in 2023

There are numerous other factors that put business leaders who purchase D&O liability insurance at risk of lawsuits, including claims related to COVID-19 involving diagnostic testing companies, biopharma, and other healthcare organizations; cryptocurrency market issues stemming from the FTX bankruptcy; inflation; ongoing supply chain issues; a possible surge in layoffs; and rising interest rates. ◼