Best’s News & Research Service - May 23, 2019 08:15 AM (EDT)
Best’s Market Segment Report: D&O Insurance Segment Improves, But Writers Navigating New Underwriting Challenges
- May 23, 2019 08:15 AM (EDT)
Oldwick //BestWire// - Although the directors and officers (D&O) insurance segment’s performance improved in 2018, a growing number of emerging issues represent new hurdles for underwriters, including unicorn companies due to their lack of transparency and governance in their financials, according to a new AM Best special report.
The Best’s Market Segment Report, titled, “D&O: Is There Really Light at the End of the Tunnel?” notes that D&O direct premiums written have been fairly stable for the most-recent five-year period, and amounted to approximately $6.6 billion in 2018. Driving segment improvement was a decline in the defense cost containment (DCC) ratio to 11.4 from 14.8 in 2017. (DCC refers to the expenses related to the defense, litigation, or cost containment of a claim.) In addition, the loss ratio remained nearly flat in 2018 compared with the previous year, at 62.1.
A factor contributing to the DCC decline was a slight drop in federal securities class action lawsuits, to 403 in 2018 from 412 in 2017, but they remain considerably elevated over prior years. Other contributing factors may include an uptick in rates and changes to underwriting strategies. Loss & DCC ratios improved for just 37% of writers, but those writers accounted for approximately 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.
AM Best notes that the largest D&O claim to settle in 2018 reportedly was Petrobras, totaling $2.95 billion. Wells Fargo followed at $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 appropriately.
Additionally, a growing number of unicorns—private companies with valuations greater than $1 billion— pose difficulties as well. In many cases, little information of the health of these companies, past what they choose to share, is available. Cyber, the #MeToo movement and growing shareholder activism, as well as emerging issues such as cryptocurrencies, will continue to challenge underwriters. Every domain, whether it be health care, technology, public companies, utilities or 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 more successful than its counterparts.
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=285801 .
AM Best is a global rating agency and information provider with a unique focus on the insurance industry.