Why this insurer is losing its appetite for D&O

Lawsuits arising from corporate mergers and acquisitions, which are demonstrating “creative theories of liability,” are reducing Chubb Limited’s appetite to insure directors’ and officers’ liability.

Since 2016, there has been an increase in the frequency of lawsuits against directors and officers, said John Keogh, executive chairman and chief operating officer of Chubb, on Wednesday during an earnings call. He was commenting on the company’s overall operations and not on Canada specifically.

Chubb underwriters are finding more and more instances in which D&O rates are “not adequate to the exposure and this has led to us, as a result, shrinking our business,” added Keogh.

In some commercial insurance lines, Chubb is “trading growth for adequate pricing,” the company said Tuesday in its earnings release for the three months ending Sept. 30.

Chubb Limited is the name of the merged firm formed in 2015 when ACE Ltd. acquired The Chubb Corp. of Warren, N.J. Chubb is now the fifth largest liability insurance writer in Canada, according to the 2018 Canadian Underwriter Statistical Guide.

There are three drivers of lawsuits against directors and officers, Keogh said Wednesday in reply to a question from an investment banking analyst.

One is what Keogh called “merger objection cases,” in which someone sues members of the board of directors of either the seller or buyer.

Another driver is the strategies used by plaintiff law firms. “There are firms out there that did not exist 10 years ago that are finding (lawsuits against directors and officers) is a great way to make money,” Keogh said. “Here we are seeing innovation. I will call it creative theories of liability in terms of suits against the boards and management teams.”

A third driver is what Keogh calls “event-driven” litigation against boards. “Imagine the traditional general liability and property claims. Think of mass tort, where you get property claims, you get liability claims: a dam bursts and people are hurt, or a cyber breach. Well guess what? More often than not, today, you also get allegations and claims being brought against management and boards of directors.”

Chubb reported Tuesday its net income was $1.2 billion during the third quarter, with premiums earned of  $7.5 billion. All figures are in U.S. dollars.

Chubb officials did not comment on D&O liability risk in Canada specifically or on Chubb’s Canadian results. Canada’s federal Office of the Superintendent of Financial Institutions reports that in D&O liability, Chubb Canada had net premiums written of Cdn$10.805 million in Q2 2018, down from Cdn$11.394 million in Q2 2017. The company’s claims ratio specifically in D&O lines increased from 54.57% in Q2 2017 to 90.56% in Q2 2018, OSFI figures show.

The loss ratio in D&O for the 15 largest D&O writers in the United states increased 11.6 points, from 65.6% in 2016 to 77.2% in 2017, A.M. Best reported. “Companies that are focused on underwriting and pricing discipline are reportedly walking away from accounts if they are unable to get their desired rate increases, and as long as competition prevents companies from implementing meaningful rate increases, profitability for D&O will continue to decline.”

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