It's no secret that over the last few years the directors & officers insurance market has been characterized by negative trend after negative trend. What passed for good news last year was that year-over-year renewal increases were only up approximately 50% in the fourth quarter.

By the middle of 2021, the D&O market is seen to be improving. We're starting to see competition come back to the marketplace, pricing is beginning to stabilize, and there are small, subtle signs that leverage is starting to rebalance. While D&O rates are still expected to increase in most situations—at least through the end of this year—the trends are definitely encouraging—unless you're going public.

Whether a company is going public through an initial public offering (IPO) or a special purpose acquisition company (SPAC), it matters how the D&O exposure is insured. In the latter category, I include both the initial SPAC IPO and the de-SPAC transaction, which almost always involves a private investment in a public entity.

It's not that the IPO D&O market is better—it's just more mature. Anyone who is familiar with that market generally knows what to expect: the premium will be very expensive and carriers will impose very high retentions for IPOs of any meaningful size and complexity.

However, as the insurance industry bore the brunt of a flawed IPO securities litigation system, that concern is now receding. It will take time for the D&O market to catch up and begin to reflect more rational cost-benefit options. I am confident we will get there though.

SPACs are a different story. Even with the recent slowdown, we are still at the early stages of this trend and its implications for the D&O market. The market for SPAC IPOs, private company programs and de-SPAC go-forward programs are continually changing. Carrier appetites continue to evolve, with some carriers exiting, others entering and many others revising their standards and guidelines.

More and more, SPAC-related securities cases are being filed. While the run-of-the-mill merger objection suits are not of particular concern, there will inevitably be some that have substance. It is the de-SPAC cases that matter more. There will likely be many more of these cases to come, and many will be complex cases in an already complex and expensive area of law.

That complexity carries over to the insurance market, particularly given how these transactions are structured and the various programs that can be at play. It is important to understand how the programs—the SPAC, the private and the public de-SPAC program—all interplay with one another and the advantages and disadvantages associated with the options available for the de-SPAC go-forward.

As we continue to work through this difficult market cycle, one positive development is that more and more clients are asking the right questions: “What am I buying?" and “What value am I getting for it?"

Nowhere is this more important than for clients who are going public, not just because of the high cost but because of the high retention levels. It's not normal to have $10 million retentions, and the fact that they have become routine is an indication of how we need to fundamentally rethink D&O for companies going public.

We continue to see too many companies paying high seven-figure premiums for the privilege of a D&O program that will likely not be a positive return on investment at the end of the day given the current retentions. They are taking a conventional approach to building a D&O program while failing to grasp how truly unconventional the market has become. 

Weigh all the varied factors that drive the decision-making process for D&O programs. This includes looking deeply at the core incentives behind the decision: the economics, the philosophical, the practical and the emotional.

I encourage companies that have not examined these core incentives in the past to do so. For companies that are going public— either through an IPO or a SPAC—it is a necessity, and it requires a multi-faceted discussion that goes well beyond the simple question of “How much insurance should I buy?" 

Rodney Choo is senior vice president of executive lines at Risk Placement Services.