Insurance rates are up for cars, homes and commercial property. Some of the biggest increases have been for policies that protect a company’s directors and top executives.
Some large businesses have struck back.
Insurers have raised premiums by 100% or more in recent years as demand for so-called directors and officers policies surged due to a wave of newly public companies and mounting lawsuits with large payouts. Higher prices helped insurers to improve their bottom lines, alongside restrictions on coverage amounts and higher deductibles.
Insurance that protects directors and officers when they are sued is essential for businesses. Without it, they would struggle to recruit top executives and board members.
Some crypto and technology companies have paid as much as $15 million in annual premiums for $40 million of coverage, or weren’t able to get D&O policies at all, said
a partner at law firm Cooley LLP. Brokers said coal-related-energy and cannabis companies also are finding commercial coverage hard to get.
To get more control over their coverage for directors and officers, some large companies are insuring themselves.
Such so-called captive insurers bring an added element of competition to the market, potentially acting as a check on prices. The path to get there required a law change in Delaware, where many large companies are incorporated, to explicitly allow them to use captives for insuring their own directors and officers, with some restrictions.
The effort was the work of more than 20 large companies, including
Meta Platforms Inc.
and biopharmaceutical maker
Gilead Sciences Inc.
The state legislature and governor approved the change last year.
Previously, the law was silent on the subject. A concern was that directors and officers insurance provided through a captive could be construed as using the company’s own money to resolve suits brought against directors and officers for wrongdoing against the company. Delaware’s law prohibited that for certain types of lawsuits, while generally allowing a company to purchase commercial insurance.
Now, companies are beginning to tap those captives. State insurance regulators have approved plans for Meta and at least one other company to use a captive to provide their directors and officers coverage. Other applications are anticipated, according to insurance brokers.
Companies welcome the option provided by the law change because they haven’t liked being “beholden to the D&O insurance market at whatever the price is,” said
a partner at broker Woodruff Sawyer, which works with Meta on its directors and officers insurance arrangements.
Meta declined to provide details about exactly how much directors and officers insurance its captive will provide. Gilead declined to comment.
Directors and officers policies accounted for $14.9 billion in premiums in 2021, a small slice of U.S. commercial-insurance premiums totaling $393 billion, according to ratings firm AM Best. The biggest companies often want policies with potential payouts in the hundreds of millions of dollars to protect their board members and top executives.
“Companies haven’t liked being ‘beholden to the D&O insurance market at whatever the price is.’”
At least for now, the insurance industry isn’t worried about losing significant revenue from the captive insurers.
Companies may potentially be able to use their captives “as leverage to drive down the rate a little bit,” said
president of insurance broker Marsh LLC’s captive management business. But they are expected to use captives sparingly for D&O, because “this can be an expensive option,” she said.
Captives typically are fully funded for the specified amount of D&O coverage they will provide, she said, so it ties up capital. Marsh clients now using captives for their D&O risks usually do so in combination with a commercial policy, she said.
Captives, which are subject to capital, reserving and other state regulations, have for decades been used for property insurance and other types of coverage. About 90% of Fortune 500 companies have them, according to the National Association of Insurance Commissioners.
Directors and officers policy premiums have come off their peaks in recent months. That is partly because of a decrease in initial public offerings and special-purpose acquisition companies, or SPAC, activity, which has led insurers to more aggressively compete for other business, said
D&O product leader for Marsh in the U.S.
Write to Leslie Scism at [email protected] and Alice Uribe at [email protected]
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