According to a new AM Best report, 2021 was the best year for directors and officers (D&O) insurers’ premium, volume and direct profitability since 2014, with insurers’ push for moderate to substantial rate/pricing increases fuelling the top line premium growth.
The report states that consistent, aggregate pricing increases by D&O writers, reportedly exceeded 10% per quarter, which was fuelled by a direct premium growth of 35% to $14.6 billion.
At the same time D&O defence and cost containment (DCC) expenses rose by only 4%, following increases of 39% in 2019 and 14% in 2020. The substantial slowdown in 2021 however, was due, at least in part, to delayed court cases.
The report also notes that with fewer legal proceedings reaching trial, and court cases and litigation delayed in general, the small increase in DCC expenses for D&O and other long-tail lines of insurance was not surprising.
AM Best also noted that DCC ratios as a percentage of direct premiums earned (DPE) also declined in both 2020 and 2021. In 2021, the DCC ratio declined 35%, while DCC as a percentage of DIL declined by approximately 29%.
Prior to 2019, both ratios had been rising with occasional volatility. However, AM Best stated again, that the lower ratios of the last two years are most likely due to the pandemic and do not necessarily portend a trend for 2022.
In addition, the report also notes that the full effect of the pandemic on D&O and other professional or management liability lines will not be known for some time. COVID-19-related D&O claims may be lagging occurrences or actions, as the pandemic continues to pose challenges for companies and the economy.
As a result, AM Best noted that the increase in premium and its impact on the line’s direct profitability may not reflect the actual depth and complexity of the challenges D&O insurers still face.
Furthermore, the report states that emerging risks such as social inflation, cyber-related disclosures, special purpose acquisition companies, litigation funding, and ESG are likely to continue stressing D&O insurers’ profit margins
Christopher Graham, senior industry analyst, industry research and analytics, AM Best, commented: “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.”
David Blades, associate director, industry research and analytics, AM Best, added: “The improvement in results in 2021 has to be viewed as a possible aberration, rather than the start of a trend—at least until full-year 2022 results are available.
“The D&O line’s bottom-line profitability in 2022 will indicate whether carriers’ actions were enough to generate true price adequacy and serve as a springboard for sustainable improvement. At the same time, with balance sheets throughout the U.S. property/casualty market remaining strong and available capital from participants already entrenched in the D&O segment, as well as external capital looking favourably on current pricing levels, perhaps a new, more-competitive underwriting cycle may be starting.”