Directors and officers (D&O) carriers are expected to continue struggling with substantial losses, stemming from years of soft premiums, according to a new report by rating agency AM Best.
The premiums have proven to be inadequate for the growing numbers of lawsuits and the size of jury rewards and settlements
Individual risk and portfolio pricing has been inadequate for the majority of underwriters, as price increases were starting from a low base and needed to make up substantial ground on claims inflation through the soft part of the cycle.
The D&O market segment follows a unique underwriting cycle which begins with heightened competition from insurers leading to lower prices.
The report also noted that soft market’s low prices will further lead to declining profitability when large abrupt losses deplete a significant amount of capital.
Following the 9/11 terrorist attacks, a new class of insurers brought new risk capital to the market that focused primarily on catastrophe risk. New insurers were also looking for new classes of risk, and D&O presented a great opportunity.
D&O losses from the dot-com bubble were quickly forgotten, and the new capital created a classic soft market, and prices dropped by 5% on average between 2004 and 2007. The price decreases during these years caused a noted deterioration in performance results.
The 2008 financial crisis affected mainly financial institutions, and the low interest environment combined with soft pricing for catastrophe risk pressured insurers to look to diversify risks.
D&O pricing continued its anemic march, despite the growing number of lawsuits, rising jury awards, and a general overlap of claims leaking into the D&O market.
