Rate increases have led to sizable premium growth in the US directors and officers (D&O) insurance, but loss ratios have not yet shown improvement, according to a new AM Best report.
The rating agency notes that through the first three quarters of 2021, the growth rate of direct D&O premium compared with the previous year is on par with the growth seen in 2020 over 2019.
Projected direct premium written for 2021, based on actual premium of $14.6 billion as of Sept. 30, 2021, is more than double that recorded in 2018, demonstrating considerable momentum for the line.
Nevertheless, the direct loss ratio loss ratio has worsened even as premium has risen by 15% on average over the last six quarters through third-quarter 2021, AM Best observes.
According to the report, the rise in costs are not limited to the losses, with defense and cost containment expenses for D&O liability, mainly for legal expenses, also increasing.
High D&O premium increases the past several years are due to emerging risks, as well as the expanding influence of social media and litigation financing.
“The effects of the rising costs of insurance claims are not only felt by insurers relative to their claim payouts and loss ratios, but also policyholders and how much they pay for coverage. This is a particularly acute problem for larger, public companies,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best.
The report states that the pace of securities-related litigation could increase in 2022, as plaintiffs focus on special purpose acquisition company (SPAC) transactions, cryptocurrency or event-driven suits.
“The growth in SPAC-related litigation also has played a role in the coverage and cost of D&O insurance,” said David Blades, associate director, industry research and analytics, AM Best.
“The number of insurers in the market who are willing to write D&O coverage for SPACs has been somewhat scarce—and less coverage and higher costs leave the management of the SPACs and the resulting entity at risk of being inadequately protected from liability exposures.”
