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What AM Best Says
Directors and Officers Market Shows Strain

Best’s Market Segment Report (Excerpt): D&O: Is There Really Light at the End of the Tunnel? (May 21, 2019)
  • July 2019
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Directors and officers insurance written premiums have been fairly stable for five years now and amounted to approximately $6.5 billion in 2018. Performance has improved, however, modestly bucking weakening loss and defense cost containment (DCC; expenses related to the defense, litigation, or cost containment of a claim) ratios.

Driving the improvement was a decline in the direct DCC ratio to 11.4, from 14.8 in 2017, although the loss ratio was nearly flat, at 62.1. One of the factors contributing to the decline in the DCC was a drop in federal securities class action lawsuits, from 412 in 2017, to 403 in 2018, but they remain considerably elevated over prior years. The drop in the number of securities class action lawsuits may also be due to the decline in the number of publicly listed firms. Other contributing factors may include an uptick in rates and changes to underwriting strategies. Loss and DCC ratios improved for just 37% of writers, but they accounted for almost 60% of written premiums in 2018. Notably, despite the improvement in loss ratios, they are still well above the historical average of 54.1 for the last eight years.

Of premiums written in 2018, approximately $5.6 billion were for claims made policies, $50 million were for occurrence, and $824 million were unallocated by the industry. Additionally, 77% of monoline D&O writers also write D&O in commercial multiperil policies, while 23% write solely monoline policies.

Supreme Court Decision Adds Complexity

The Supreme Court's recent Cyan decision (Cyan v. Beaver County Employees Retirement Fund) makes assessing D&O exposures even more difficult. On March 20, 2018, the Court ruled unanimously that state courts have concurrent subject-matter jurisdiction over class actions alleging violations of Section 11 of the Securities Act of 1933, so that the same case against directors and officers may now be tried in both federal and state courts. However, state lawsuits are difficult to track, making D&O exposure more difficult to gauge accurately. Further, state courts may be less likely to dismiss cases, which could increase frequency and possibly severity, necessitating rate actions.

Rate Actions Are Up

The Council of Insurance Agents &Brokers has shown that, on average, CIAB members raised D&O rates in each quarter of 2018, albeit modestly. However, rate activity suggests that D&O performance may be cyclical, given that rate increases in 2012 and 2013 contributed to DPW growth in 2013 and 2014.

The same series of CIAB surveys shows the range of D&O premium changes by the reporting brokers and members. Although the majority of quarterly premium changes are revenue-neutral, 2017 saw more rate reductions, while 2018 saw more rate increases.

In 2018, Willis Towers Watson surveyed executives from companies in a wide range of industries and regions about D&O liability and found that rates were rising for 24% of respondents—10% with increases of 5% or more. WTW concluded that clients may be finding competition is not driving insurance rates down as much as in the past.

Severity Remains a Concern

According to Gallagher (based on data from Advisen), the largest D&O claim to settle in 2018 was Petrobras for $2.95 billion, followed by Wells Fargo, for $480 million, so the exposure to very high settlements persists.

Carriers remain concerned about rising defense costs; even if the courts determine no loss event has occurred (or that a claim should be excluded), defense costs continue to grow and need to be priced for. Additionally, Cornerstone research reports a significant increase in average settlement amounts.

The top 15 insurers have been implementing proactive underwriting strategies through rate actions and reshaping their portfolios by shedding unprofitable business and protecting niche profitable segments where they may have strong distribution relationships. Of the top 15 writers, CNA and Fairfax Financial Group saw the highest growth in writings in 2018—12.8% and 20.6%, respectively. CNA increased writings by $51.5 million, and its loss ratio improved from 74.5 to 59, which means it wrote more business at a higher profit, in a challenging line.

For a second year, the top two writers wrote less than they did the prior year. According to the latest data, American International Group, wrote 7.7% less D&O than in 2017 ($868 million versus $940 million), and Chubb, 2.6% less ($767 million versus $787 million). AIG posted adverse reserve development of $362 million in the fourth quarter of 2018, attributable mainly to financial lines.

Public company D&O has been the segment's poster child for problems, but a growing number of unicorns (private companies with valuations greater than $1 billion) pose difficulties as well, given the lack of transparency and governance in their financials. Cyber, the #MeToo movement, and growing shareholder activism, in addition to emerging issues such as cryptocurrencies, will continue to challenge underwriters.

Every domain (whether health care, technology, public companies, utilities, not-for-profits) has its own specific issues, and an insurer that has a well-defined risk appetite and invests in underwriting talent with deep knowledge will be generally more successful than its counterparts.

This Best's Market Segment Report is available at

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