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AM Best: Recent D&O Improvements May Stall Amid Market Challenges

Earlier this year, AM Best affirmed its negative outlook on professional lines, of which D&O is an important part. Expanding risks associated with cyber liability, information privacy and employment practices are among those concerns.
  • David Pilla
  • July 2022
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Directors and officers underwriters have seen steadily rising rates over the past few years that corrected for previously inadequate pricing, but a recent moderation in increases raises questions about the market's ability to hold the line as trends point toward greater exposure in key areas.

A panel participated in “AM Best's Briefing - D&O Market: Start of a New Underwriting Cycle?” and discussed AM Best's views on the professional liability segment, the results of the D&O segment for 2021 and a prospective look at 2022 and beyond.

David Blades AM Best

"D&O underwriters have been more aggressive than other professional lines underwriters in raising premiums so there may be a more positive outcome for that market than professional lines as a whole."

David Blades
AM Best

There was a notable growth in direct D&O liability premium volume since 2018, with direct underwriting profitability seeing considerable improvement in 2021, said David Blades, associate director, AM Best, during the annual AM Best analytical briefing on the D&O market. He said D&O insurers have dealt with a number of challenges.

Related: AM Best: D&O Insurance Market Expects Continuing Headwinds Into 2022

The D&O segment witnessed a turnaround in profitability in 2021 as calendar-year loss ratios decreased and premiums increased on the back of pricing momentum over the past six quarters, said Blades.

Earlier this year, AM Best affirmed its negative outlook on professional lines, of which D&O is an important part, said Blades. Expanding risks associated with cyber liability, information privacy and employment practices are among those concerns, as well social inflation and environmental, social and governance issues, he said.

D&O underwriters made a concerted push to address price adequacy over the past few years, said Blades. Over the second half of 2021, AM Best has seen a plateauing of pricing increases, meaning either insurers see enough progress that the increases didn't need to continue at the same level, or competition and new capital limited the pace at which price increases could continue, he said.

Rising inflation is another continuing challenge for D&O insurers, said Blades.

Following aggressive price increases and actions on the underwriting side from D&O underwriters in 2021, a downward trend in price increases calls into question whether the recent plateauing happened too quickly, said Blades. As the recent rate increases earn through, it will be left to determine whether pricing is adequate to support future underwriting, considering the inherent challenges still faced, he said.

D&O underwriters have been more aggressive than other professional lines underwriters in raising premiums so there may be a more positive outcome for that market than professional lines as a whole, said Blades.

Public companies have been faced with “sticker shock” in their D&O rates for a few years, said Seth Pfalzer, senior vice president, Northern California management liability practice leader, brokerage and consultant Woodruff Sawyer. He said they have seen increases in both rate and retention and it has caused a lot of pain.

The rates have continued to increase but at a decelerated pace, particularly in the second half of 2021, he said.

A continued deceleration so far in 2022 is partly due to lower activity in initial public offering and special purpose acquisition companies, said Pfalzer. Until such markets open up again, the only business to chase is renewals business, he said.

There is a firming D&O insurance market on the one hand and a softening reinsurance market on the other, said Danny Hojnowski, North America practice leader, U.S. D&O, TransRe. The majority of the D&O treaties are written on a quota share basis, so all the rate is passing through to the reinsurers, which makes reinsurers hungry to write more business, he said.

“We're in a supply and demand imbalance” where reinsurers want to write more business but companies are looking to retain more, said Hojnowski. The primary market is hardening while reinsurance is softening, he said.

Cyber liability as it is related to D&O can be “painful” as conversations about both are at the board level as companies are going to have a cyber expert in the room with a D&O expert, said Pfalzer.

Blades said there is a potential overlap between cyber and D&O due to pressure on directors from data privacy and other regulations as well as the threat of financial and reputational losses.

One of the biggest drivers of D&O severity is securities class-action litigation, said Hojnowski.

He added ESG is a big worry as more disclosure is required of companies. Such disclosure is a “roadmap” for the plaintiffs bar to bring a case, he said

“Rate has come through for a reason” and with plateauing, Hojnowski said he hopes rates don't come back down too much.

Related: Best’s Special Report: U.S. Directors and Officers Insurance Market Posts Best Results Since 2014

There was a record-setting explosion of SPACs in 2021 as premiums increased four to five times amid limited capacity, said Pfalzer. He noted a short ramp-up in companies moving from private to public, and the plaintiffs bar has been targeting that activity, he said.

Pfalzer said there is a potential wave of SPAC litigation, a trend he is watching for.

Today, more than a dozen entrants are bringing D&O competition and energy into a market that needs it, said Pfalzer. He added having more capacity is going to put pressure on the market.

With significant growth in the segment's top-line premium and profitability on a direct basis, results in the U.S. D&O insurance market in 2021 were the best insurers in the segment have recorded since 2014, according to a new AM Best report.

In its May 9 Best's Market Segment Report, titled D&O Insurance: Positive 2021 Results, But the Segment Still Faces Formidable Challenges,” AM Best states consistent, aggregate pricing increases by D&O writers—which reportedly exceeded 10% per quarter—fueled direct premium growth of 35% to $14.6 billion.

“Excess capacity has been a primary contributor of the disparity between rates and the pricing of risk exposures, even as the loss ratio crept upward. With results worsening because of factors such as social inflation, litigation funding, environmental, social and governance concerns and cyber-related claims, insurers have pushed aggressively for elevated premiums upon renewal, as well as higher self-insured retentions and more-restrictive terms and conditions,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best, in a statement.

The report notes further improvement in the market depends largely on whether insurers remain disciplined and focused on meeting rate adequacy needs and offsetting claims costs that continue to rise.


David Pilla is news editor. He can be reached at: david.pilla@ambest.com.




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