According to analysts at AM Best, one key question that currently surrounds the US directors & officers (D&O) insurance segment is whether carriers can sustain their recent, more favorable results given less aggressive pricing amid high social inflation and inflationary economic pressure.
In Best’s market segment report, ‘Hard Market Gives Way to Changing Dynamics for D&O Insurers’ the firm states that “aggressive double-digit pricing increases” in 2020-2021 benefited current bottom-line results.
The report also highlights how rate and price softening has become “the norm”, which ultimately has led to declining premiums because of improving loss trends. Competition within the D&O segment has also risen, as established markets defend their positions on renewals and new entrants make their presence felt.
Moreover, D&O liability direct premium written saw a decrease from $10.3 billion to $9.7 billion for the first nine months of 2022, despite decelerating pricing increases of between 7-8%.
Best noted that with year-over-year D&O liability premiums dropping and resulting premiums growing at a level slightly below economic inflation, the segment could be susceptible to the continuing effects of social inflation on existing open claims.
Christopher Graham, senior industry analyst, AM Best, said: “The pandemic-driven court backlogs has lengthened the tail on liability claims for D&O insurers. The high number of cases litigated and the duration of litigation may result in elevated legal expenses, raising defense and cost containment expenses. If social inflation drives an increase in ultimate incurred losses, D&O insurers’ bottom line would be impacted negatively.”
Further, the report also showed that the number of IPOs declined dramatically in 2022, down to just 110 from 968 in 2021. Best stated that the substantial cutback in IPOs is a “key driver” behind the drop in D&O liability direct premium in 2022.
Many companies that purchased D&O insurance for first-dollar coverage are instead buying only excess insurance, therefore taking premium away from the overall marketplace.
David Blades. associate director, industry research and analytics, AM Best, added: “If severity does not improve as claims work their way through the court system, some insurers may find that the less conservative pricing stance taken during 2022 and into 2023 is not supported by actual results and could cause the winds of change to blow in a direction that is once again not favorable for policyholders.”
Meanwhile, another recent report from AM Best highlighted how the impact of the recent earthquakes in south-eastern Turkey, adds to what is already a challenging operating environment for re/insurers within the country.
