Property/casualty insurers active in the directors & officers (D&O) liability market could have difficulty maintaining underwriting performance in 2018 as market pricing remains highly competitive, and claims’ trends point to challenges ahead, according to Fitch Ratings.
As a niche segment in the U.S. insurance market D&O insurance has seen a trend of declining rates which is forecast to continue into 2018, with market capacity being relatively unchanged and business competition remaining intense.
D&O pricing overall is likely to see flat to 7% lower rates in 2018, according to Willis Towers Watson’s Marketplace Realities 2018 report.
Fitch forecasts that public company excess layer rates could drop 5-15% while private and not-for-profit organizations, which had less favorable overall underwriting experience in recent years, could be an exception in the D&O segment and experience moderate 2018 price increases.
Although price increases could be seen in several individual market segments this year following poorer overall U.S. property/casualty industry results and large catastrophe-related losses in property lines, D&O market pricing is expected to be less impacted by these broader market circumstances.
Adding to the challenges facing the sector is the fact that D&O claims could be shaken by a growing amount of securities class action lawsuits.
The number of outstanding federal class actions still pending from all filing years is at a ten-year high, according to NERA Economic Consulting, and Fitch explained that while “settlement values of suits have moderated in the last few years, the potential for future larger cost settlements remain.
“Public company executives’ liability exposure continues to evolve. A greater inclination of courts to seek to hold executives individually accountable for corporate crimes following the 2015 Yates memorandum from the Department of Justice adds to this personal exposure.”
A hint of higher general inflation amidst stronger economic growth could contribute to a rise in defense costs and settlement values of longer duration liability claims going forward.
In addition to these challenges, the proliferation of cyberattacks is creating newer sources of D&O risk which, Fitch noted, could 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 adding to the pressures facing D&O insurers.
The likelihood that the risks from the D&O segment will individually drive insurer ratings are limited outside of extreme crisis periods and events, said Fitch, adding that despite the many challenges facing the sector, insurers are likely to absorb or offset potential large losses with results from other segments.