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Property Casualty

Buying Directors and Officers Coverage Amidst Banking Failures and Economic Pressures

Ryan Anderson
Ryan Anderson
Property Casualty

The economic outlook has been one of debate, but many fear we’re heading into recession based on several indicators. Continued pressures on interest rates, supply chain issues, revenue constraints, and inflation are all contributing risk factors. Add to those the recent bank failures at Silicon Valley and Signature Bank as well as pressures on several other notable institutions, and fuel has been added to those fears.

So, how will these events impact the Directors and Officers (D&O) insurance buying market for other banking institutions?

The Stability of Directors and Officers Insurance Rates

From a timing perspective, we’re in a much better place now then we were 18-24 months ago. If these failures took place in 2021, or even the beginning of 2022, buyers would have experienced a severe impact amidst trending litigation as well as pricing and capacity constraints.

However, the insurance market has since been able to largely “right-size” itself through stricter underwriting, several years of elevated premium levels, and declining loss trends. Couple the trending with the impact of, what many hope to be, isolated events, and the immediate outlook for D&O buyers, we feel, remains stable to favorable in the banking sector.

We have witnessed a small number of established insurance markets pull out or drastically scale back their capacity within the banking sector. In contrast with the “hard” market, there have been new market entrants willing to entertain financial D&O risk (excess and/or primary capacity), and with the re-established, elevated premium levels, many others are finding resolve in their current portfolios.

Beginning in the second half of 2022, D&O rates began to flatten and ultimately soften. This trend continued into the 1st quarter of 2023. The bank failures did shine a light on possible systemic issues into the future, but the events themselves are not thought to be on a scale large enough to impact the stability of the overall marketplace.

Class-action lawsuits were almost instantaneously filed and carriers on those individual D&O programs may experience loss, but the magnitude of these events (if they remain isolated) will not immediately shift the balance.

Underwriting diligence will become more stringent as carriers probe further into overall asset quality, investment durations, deposit analysis, and overall relationship with regulators. The process to buying will become more challenging, but the results should remain favorable for buyers in the near term.

Partner with a Broker Who Watches the Market Closely

As stated, we do expect the D&O market for financial institutions to remain stable for the time being. Several analysts and insurance industry insiders have gone on record stating that they are cautiously optimistic that the recent failures are isolated and will only cause a “ripple” in the buying market. However, if we look back to the most recent credit crisis of 2008 as an example, the initial failures also appeared to be isolated and there were several months between those events and the subsequent crash of the overall market.

Are we in a similar lull? The facts and circumstances leading to the 2008 crisis were different than those we currently face, but we remain cautious that similar events (i.e. bank failures) may still transpire. Coupled with the continued hardships on the economy itself, and we could find ourselves in another challenging buying market towards the end of this calendar year.

Interested in learning more about this and how it could impact your business? Just reach out; we’d love to talk.

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