Financial R&R: Litigation, Claims and Regulatory Changes - What the Balance of 2021 May Look Like

Introduction (00:01):
Welcome to Financial R&R. A show dedicated to financial insurance and risk management solutions and trends shaping the market today. Here are your hosts, Ron Borys and Ryan Farnsworth.

Ron Borys (00:14):
Welcome everyone. This is Ron Borys with the Alliant Financial Institutions group, and I'm here today with my colleagues, Ryan Farnsworth, and Steve Shappell. We were just talking. It's crazy to think that we're almost halfway through the year or we are halfway through the year. Time flies when you're having fun, I guess. And we thought it would be great to just touch on some things that we've observed in the market from both the claims and from just an overall market trends perspective. We know there are a lot of people out there that share different perspectives in different ways. And we thought that this would be a great way to share kind of what our view is of the market and kind of what we're seeing with our customers and the broader industry. So, Ryan, I think we said we wanted to start with claims, right? We always sort of say, we leave claims for last. So, this time we're going to start with our head of legal and claims Steve Shappell. So, Steve wanted to tell us a little bit about what we're seeing in the overall market condition-wise from a claim’s environment perspective.

Steve Shappell (01:05):
Yeah. Thanks, Ron. It's been an interesting year so far. We have at midpoint 106 shareholder class action suits. When I compare that to last year, we had at this point 182 and in the previous year we had midway 221 and then 202. So, it's been a rather remarkable year. Considering in 17, we had 411 lawsuits. In 18, we had 402 loss shareholder class actions. In 19, 402. Last year, 322, and just a tick over a hundred this year. So that's quite interesting. The other interesting point is there was a lot of prediction and tea leaf reading about SPAC litigation and probably well-deserved because we saw a lot of SPAC litigation early on, and that's the blank check company litigation and as we talked about in other podcasts, the explosion of SPAC IPO's and then resulting in De-SPACs and business combinations. And while we saw 14 of those early in the year, it has really slowed down dramatically to the point that in the last month, there has not been a class action, which was premised on SPAC litigation. And the vast majority of the recent SPAC litigation filed reads more like kind of the typical 10-B-5 allegations that we see in other shareholder class action litigation. So, it's been an interesting development of the slowing of the SPAC litigation and the slowing of shareholder class action litigation generally.

Ryan Farnsworth (02:42):
Steve, what do you attribute that to? I mean, that's a remarkable slowdown compared to the last four years, which quite frankly, were a big factor in driving the market conditions that we're seeing on the placement in the brokerage side. Now, why is it from your professional opinion? Why are we only at a hundred and change throughout six months of this year?

Steve Shappell (03:03):
I think probably the most significant factor, Ryan, is going to be the way the market has performed. Shareholder class action litigation is really driven by a drop in share price. If you don't have a dropping share price, you don't have damages. You don't have a viable cause of action. So, I think the fact that we have such an impressive bull market is probably the most significant factor contributing to the decrease in shareholder class action litigation.

Ryan Farnsworth (03:35):
That's interesting. I mean, that makes sense. And we've seen that trend since 1995 when the federal securities class action litigation trends have peaked. There tends to be that lag in where security class action lawsuits are filed and how the market's performing, but with all the other market dynamics, you'd think that there'd be some uptick that would result in those types of litigation continued, but we're just not seeing that. And as a result, it's interesting to see where these trends are coming from and why they're coming the way that they are. There's been so much talk about SPAC litigation. We've talked about this with a lot of underwriters. I think we've talked about this on past podcasts as well, is that SPAC-related litigation sometimes doesn't even involve the SPAC. It doesn't even have ties to the duties of the directors and officers of this SPAC. And so even as we break down claims and litigation trends, we see the same types of theories and analysis coming out on, on the underwriting side, as underwriters are looking at risks and as clients are trying to differentiate those risks, it's so important to break that down and think about the implications of all those points.

Steve Shappell (04:41):
You're exactly spot on there, Ryan. That's exactly what we're seeing in the marketplace and the claim environment.

Ron Borys (04:48):
So, Steve, obviously there are multiple facets to claims and just actions brought by the plaintiff's bar. What are we've been seeing for the first six months on the regulatory side? Obviously, we know that the SEC just sort of sent requests for information out to a number of firms in connection with the solar winds breach that happened at the end of the year. And I know you and David are working on something to sort of dive into that a little bit deeper, but maybe you can just talk to our listeners today about what are we seeing on the regulatory side.

Steve Shappell (05:17):
What we're seeing on the regulatory site is for sure, an engaged SEC. So, we're seeing the SEC and the solar winds is just a great example of rolling up its sleeves and making inquiries, right? The SEC has been very aggressive with regard to SPACs, right? We're talking about SPACs, right? You'll look at the regulatory activity there. They have been very involved in issuing a tremendous amount of guidance and their position, they took on warrants, for example, and they will really put up a slowdown on the SPACs. And we're seeing it where with solar wind, the SEC is looking for some voluntary cooperation as they delve into some of the practices of our public companies. And what will be interesting, right? This voluntary cooperation is always an interesting twist of fate for a market. It creates some significant challenges of the SEC's requests, which can be very, very cumbersome, time-consuming, expensive to “cooperate”, but the downside, right, the SEC has, and the DOJ alongside them have historically been very difficult with firms that don't voluntary cooperate. So, I think this is what we're going to see for the next four years out of a re-engaged SEC, looking to flex its regulatory muscle.

Ron Borys (06:42):
I think it is probably not a coincidence, right? That the news stories of today were fact that I guess Denmark's central bank, was compromised during the solar winds hack. And according to some of the things that I read left a back door open to its network for up to seven months, I mean, again, this is all stuff that we're reading out there. And then certainly the underwriters who are underwriting cyber risk are reading. So, it's just really interesting, right? As we sort of get ready for the second half of the year, right on one end, we can sit back and say, well, the plaintiff's bar has been a little bit quieter the first half of the year, probably the least amount of findings we've seen in close to half a decade. But then there are other things that are sort of keeping people busy on the claims side and keeping insurers up at night. So, as I said, it'll be just very interesting to see how this all continues to play out over the course of the year. Because like we said, the market's been hard now for probably 12 to 18 months. Like really hard since probably the start of COVID. We know this is a long-tail business. So, it's really hard to say, well, if claims filings are down, for the first half of the year, well then, the market's going to start turning and it's going to get better for buyers over the course of the next 6 to 12 months. As we know, it's a little bit more complicated than that. And maybe we can spend a few minutes, Ryan, just talking a little bit about what our brokers are seeing from just an overall market condition, perspective, character, behavior, retentions, pricing, and maybe try to look into our crystal ball a little bit and forecast what we can anticipate over the last six months of the year.

Ryan Farnsworth (08:15):
You and I are not going to do is profess to be cyber experts in all of this takeaway, take away from John Loftus, David Finz, and other cyber experts. We could probably have had our own podcast right now about the ups and downs and the expectations for the cyber market, which has just been crazy during the 2021 timeframe and probably deservedly so, given the continued activity that we see from a cyber-risk perspective. But setting that aside, the broader spectrum of the D&O, E&O and financial lines marketplace has definitely seen a slowing in terms of where the rates are going. And, and you look at year over year, had a conversation the other day with an underwriter who will remain nameless, where they were saying their last three deals that they renewed in June were actually premium decreases. Now, part of that was because of the adverse reaction. The market had many renewals last year undeservedly so in the wave of the pandemic, starting and not knowing what was going to happen. 12 months later is a little bit better time to look back and determine whether those types of adjustments were appropriate or not. It's an interesting point that was made because it's a variety of factors.

It's the risk itself. It's the market that's applied by competition from carriers because there has been entrance into the marketplace in the last 12 months, meaningful players who are willing to provide capacity at the rates that were escalated to last year. And that competition is real and carriers, they don't want to lose good risk and good business. I think there's been during the soft market of call it 2011 to 2017-18. There were a lot of markets that I think regrettably looked back and said, we lost a lot of good business because we had some discipline that that was maybe unnecessary based on the risk of the exposure. And we've harped on that many times on these podcasts is that risk-based underwriting is a real thing. And clients that have a favorable risk profile are being targeted by underwriters specifically this year, as they come off perhaps a negative renewal last year and maybe the premium impact was worse than it maybe should have been. It's so important this year to identify a marketing effort that is focused on the risks that are present and where the insurance is currently priced. And starting early throughout the process with the underwriters and working with our clients to differentiate those risks is one way that we're trying to help our clients find that way to manage their risk. And it's proving to be effective because we don't see for certain sectors of the market, much pushback from the underwriters in terms of renewing with a small increase, a flat renewal, or even a decrease as was evidenced by this underwriter. So, it underscores the focus that we've had throughout this year that continues to play out positively for our clients that we see. If we start early in the process and develop a plan and a strategy, we can execute something that's going to be favorable from our client's perspective.

Ron Borys (11:31):
Yeah, no, listen, I think those are all very valid points. I think one of the things that we've seen particularly during this last hard market cycle is as thorough as the underwriters are and asking their questions and performing their diligence and doing the underwriting that they need to do. The reality of what's driving the market right now is pretty simple supply and demand. There were many markets that were to kind of exercise caution with regards to writing new business for a period of time, just because there was a lot of uncertainty with regards to the world, given the pandemic. I think people are starting to see what the reopening will look like for the economy and for the broader business sector. And I think there was a belief that there was a tremendous amount of stimulus money propping up a lot of industries and whether or not those industries will fully recover once the stimulus money is no longer. And maybe we can kind of just go around the horn a little bit from an industry sector perspective, right? Cause we know we touch a lot of different industries and have plenty of subject matter experts within the financial institution's group, asset management, right? I mean, there's a broad term. You got hedge funds, you got traditional 40-act firms. You got private equity; I'd say traditional asset management is relatively stable. Hedge funds, are relatively stable. Private equity, is still somewhat challenging, probably more so in large private equity, I think mid-market and small private equity. It depends right on what market you approach. And there are some markets that have a different appetite for private equity than others. So, I think insurer selection is really important. When I look at the banking industry, I think the community bank sector continues to be relatively favorable, large regional and super regional banks. I think again, regulatory concerns will continue to be there, especially with very active CFPB. Insurance companies I think are performing relatively well. Any other sectors that I haven't sort of identified there?

Ryan Farnsworth (13:22):
Well, I think there's a growing factor of crypto risks that are underlying all of these industries. There are considerations for Bitcoin, ETFs and other cryptocurrency funds that are on high alert from an underwriting perspective that the regulators don't seem too eager to move those types of initiatives forward as quickly as the underwriters would hope. And I think you touched on it a little bit on private equity within every sector, there are favorable risks and there are favorable companies that underwriters will be competitive with, and they will, they will compete and provide coverage and terms that are fair to them. What's been interesting regardless of the industry, is that as we have the opportunity to market renewals and go through that renewal process where underwriters are quoting based on the risk itself and not perhaps knowledge of the expiring pricing or otherwise, we're getting far different results than when underwriters are focused on the expiring pricing. And I think that speaks to there. Ron, you touched on it earlier when you talked about some insurance companies not wanting to write new business towards the end of 2020 to let things focus. It was clear that as 2021 started, there were insurance companies that had rate initiatives. It almost seemed to be for focusing on their risk exposures. They were trying to understand what the existing pricing was, so they could focus on the rate and not the risk. And we've seen that process just hasn't worked and it doesn't work. Our clients are unacceptable of that approach as are we, the risks should be priced based on how the potential for claim is and how they're regulated or otherwise could potentially face litigation or another claim. And when we've seen those true new buyers or fresh marketing exercises where we're replacing the primary, it's been interesting to see how the market truly reflects and buys into those, those marketing approaches they work, and clients should be very open to revisiting their existing client relationships from a carrier perspective. Now, when it comes to D&O and E&O-related risks, incumbent relationships are super important, and we don't want to disregard that. And so that's why it's important to start early and develop a strategy that works best for clients and their approach on how they want to manage risk.

Ron Borys (15:43):
Again, interesting stuff. And I think certainly anybody who's listening here today is hopefully taking notes and sort of realizing the ways to find successful outcomes with regards to their renewals and in 2021, at least over the second half of the year. And certainly, try to find the more rewarding way to manage risk. I guess, for the two of you, just last takeaways, as we think about the second half of the year, right? We know July will be a little quiet. August tends to be quiet. And then, kids go back to school and the race is on for the last four months of the year. What do we think based on observing the first half of the year? What are some things, and, and Steve, maybe I'll start with you just from a carrier or claims perspective. What can we expect to see out of the carriers over the course of the next six months from the claims side?

Steve Shappell (16:25):
So, I think from a claim perspective, I think we'll see ongoing good behavior from carriers, right? Carriers continue to be very, very good at this. Often, they need to be nudged, but that's full employment for me. But one of the things that we'll see though, we'll see an uptick in claims, right? We will. We won't have just 200 claims at the end of the year. So, we will see an uptick in claims. Will we see more merger objection lawsuits? I think we will. Right? Those have dropped off. I think we'll see more merger objections as we see these SPACs. And so, there'll be more claim pressure on carriers for sure. And we'll see, right? A large loss drives interesting behavior. So, we'll continue to monitor closely, but I'm not a professional optimist I'm a professional cynic. And I think we have to expect that the second half of the year is not going to look like the first half of the year in light of the last four years of claim volume.

Ron Borys (17:18):
Yeah. And I think the key to a good working relationship with your carrier is effective communication. And I know you and your team have done a fantastic job, making sure that we're bringing our clients together, working closely with their carrier partners and making sure that we're working through these types of issues together. Ryan, same question for you, right on the brokerage side, on the renewal side, what can we expect? Right. I mean, we certainly had an interesting first half of the year. I know we've been super busy with a lot of different things going on. What should our clients expect come renewals over the last six months of the year?

Ryan Farnsworth (17:51):
I think our clients can expect a slightly different market than they saw during the last half of 2020 to their benefit. And, Ron, you talked about, July and August being quiet. I mean, we're hopeful that we can have conversations with all of our clients that have renewals between now and January of 2022 in those months to get ready for what's ahead and put a plan together to take advantage of the market. And how do we create that competition? Because as we saw, even during the last half of 2020, there was still a lot of capacity that was unwilling to write new business or look at the risk itself over certain premium targets or preservation of their book, not knowing what's ahead. Well, now we have those six months behind us and there's going to be more competition, whether it's on the primary and or the excess of any type of renewal, the best thing to do is start now and have the conversations and receive even midterm updates from your broker. The biggest issues that we find in negotiating optimal results are when we start late or we get information back late, and we have limited time to really try to help underwriters understand what the risk perspective is when they're still focused on how long this hard market is going to ride. And, I think as we look ahead into even 2022, it's going to be something to track is how the new capacity is competing. And where do we see them playing on, on programs and how broad will their effect have on the market and the broader premium aspects of what the underwriters are going to be looking to do on their renewals.

Ron Borys (19:30):
Listen, I, really appreciate this conversation and those who have tuned in today, I think they're, going to take a lot out of it. I think communication, collaboration, cooperation, those are really important themes. Whether it's working with your broker, working with your underwriters working with your claims folks. I'm very thankful for having the two of you on our team here. And I know many of our colleagues and clients feel the same. So, if anybody has any questions or wants to learn more about what we're doing here at Alliant, you visit our website at www.alliant.com. But with that, we'll wrap up today's podcast and talk to you all again in the near future.