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COVID-19 to drive near term D&O losses: Fitch

22nd October 2020 - Author: Charlie Wood

Fitch Ratings analysts expect underwriting losses to continue over the near term for the US directors & officers (D&O) liability insurance segment.

While claims related to the COVID-19 pandemic will take several years to fully pay out, Fitch says there is limited risk to ratings of individual insurers from the D&O segment tied to pandemic-related claims.

Analysts note how underwriting performance for the segment has been negatively affected by many years of competitive pricing and ongoing increases in multimillion-dollar jury verdicts and claims settlements.

It’s estimated that the D&O segment has reported statutory underwriting losses for three consecutive years from 2017 through 2019, including a 106.6% direct combined ratio in 2019.

Despite renewal rate pricing skyrocketing, results remain under pressure with the direct incurred loss ratio rising to 62% at the first half of 2020, the highest midyear level in 10 years.

The Council of Insurance Agents & Brokers commercial market survey indicates that D&O renewal rates moved 16.8% in 2Q20 versus a 4.3% increase in 2Q19. Rates on excess coverage layers are increasing at a higher rate.

Fitch adds that the ongoing coronavirus pandemic represents a new vein of potential claims losses for insurers in several casualty segments, particularly D&O.

Allegations may arise for leadership of companies experiencing shareholder value declines or insolvencies from the economic fallout of the pandemic.

Claims may also be pursued against organizations that failed to protect employees or customers from exposure to the virus or serious illness.

Entities creating protective products or vaccines to prevent the virus or treatments for afflicted individuals that prove ineffective also face unique new D&O exposures.

Analysts note that, in recent years, D&O claims have emerged in areas including cyber events and employment practices matters where alleged negligence or poor governance practices effected corporate reputations or generated material financial losses.

These can lead to more allegations of a lack of management oversight of information system security and lax risk management. Class action filings related to cryptocurrencies are also a recent phenomenon.

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