Marsh's Fahey: Private D&O getting increasing priority among large carriers as IPOs dip

By Isha Marathe

June 17 - (The Insurer) - Insurance carriers and brokers are building out proprietary pricing models for private directors and officers insurance products as the public market remains soft with too many players and plateaued IPO activity, said Will Fahey, managing director for private equity clients within Marsh's financial lines.

The public D&O market has remained hyper-competitive for insurers that view it as a more profitable and glamorous line, with opportunities to connect with powerful executives in large organizations and a good lead into other lines of business. But with a continued retreat on prices, a trend of private companies postponing IPOs and a greater number of carriers fighting over viewer businesses, public D&O "is just not a winning formula" anymore, Fahey said.

"Major insurance companies' quarterly or analyst calls are highlighting financial lines in the U.S. as maybe the line of business that's their greatest concern... We have not had a lot of IPOs this year to introduce new opportunities into the marketplace," he said.

"Pricing adequacy in public D&O is acute and people are very concerned about that as prices continue to come down right now."

Against that backdrop, private D&O has become attractive to big and small carriers and brokers, Marsh included, Fahey said.

THE PRIVATE D&O APPEAL

Fahey sees the private market as an almost "infinite landscape" of opportunity for D&O underwriting.

"(P)rivate D&O is a way to write that business more profitably, there's somewhat of a less competitive dynamic in it than public," he said.

"I led a call for a prospective IPO last week, and we had 63 companies on the line competing for it... So there's not enough business to go around to feed all of those mouths."

Additionally, limit profiles are more manageable in private D&O as well, he said. Where your average limit could be in the range of $10 million to $15 million in the public market, the average limit in private D&O sits closer $3 million to $5 million.

"So, you can be wrong a lot in private company D&O and withstand that, whereas if you have $15 million losses you're kind of in bad shape," he said.

With fewer claims than the public D&O market, which is driven by securities class actions, and a better loss history, the private D&O market is where carriers are most "celebrating growth," despite the comparatively lower premiums, Fahey said.

"Growing a private D&O business requires a presence beyond New York and Chicago, and into places like Dallas, Kansas City, and as many places as you can, because there's local business there that you will only access if you have people locally," he said.

Larger carriers and retail brokers are able to grow into the business by appointing underwriters across the country.

But the digital capabilities and the required agility for local businesses also allow newer carriers to establish themselves in the private D&O market.

Where the public financial lines might sideline a startup carrier to "just writing cheap excess capacity," in the private D&O market, they can utilize an aggressive digital distribution strategy, go through wholesale channels, or establish a program channel, through which they can compete with larger carriers and retail brokers, Fahey said.

PRICING MODELS

While carriers may want to expand from public D&O to private D&O, a challenge is the more amorphous nature of pricing for private products.

While public D&O policies primarily focus on covering securities lawsuits, private D&O policies offer broad entity coverage, with whatever is pared back being done so through exclusions, Fahey noted.

This is a double-edged sword.

There is opportunity to build out a highly customized D&O policy that can shift between the needs of larger and smaller companies more nimbly. However, it also makes pricing more complicated.

While a public D&O pricing model can rely on readily available data on SPAC litigation and the settlements for each lawsuit, private D&O entails "any number of different perils that cause a loss, and (are) not public information," Fahey said.

Essentially, to price a private D&O policy, an underwriter will have to scrub data from pre-ERISA to private equity services, and several more sources, depending on the product.

For brokers and carriers, this gap in the market has created an opportunity to utilize AI solutions to scrape data and build out more comprehensive pricing models.

Marsh, for instance, is developing its proprietary pricing model focused specifically on private D&O to better serve the growing interest in that area.

"I know of other large carriers doing it as well," Fahey said.

"It's a heavier lift, but the fact that that investment is going on tells me that there's just more investment in the space."