Strong underwriting performance in the US directors and officers (D&O) liability insurance market is expected to put downward pressure on rates due to reduced demand in this segment, according to a recent report by credit rating agency AM Best.
Based on findings from Best’s Special Report, direct premiums in the monoline directors and officers (D&O) liability segment decreased for the second consecutive year in 2023.
The segment has sustained favourable underwriting performance for three consecutive years, with last year’s direct loss ratio of 50.8 achieving its best level in a decade.
“Following more than 10 years of soft market conditions, which left most monoline D&O risks underpriced, the significant increase in pricing from 2020 and 2021 in particular led to a notable decline in the direct loss ratio,” commented David Blades, Associate Director, AM Best.
The report suggests strategic changes in how insurers approach current D&O liability risks, indicating a potential ongoing decline in the loss ratio ahead.
In recent years, insurers have increasingly refrained from offering high limits per individual risk, a practice more prevalent in the 2010s that significantly contributed to adverse loss severity trends over the past decade.
Despite these adjustments, several challenges persist. Escalating settlement and litigation costs, expanding exposures from new technologies, and anticipated further price reductions in 2024 collectively contribute to AM Best’s current cautious outlook for the US D&O liability segment.
Broadened contract terms and the impacts of social inflation, litigation funding, legal advertising, and corporate D&O risk exposures could negatively affect calendar year results.
Excess and surplus lines insurers benefited from stringent market conditions in 2020 and 2021, resulting in more D&O liability business being underwritten on a non-admitted basis and contributing to favourable calendar-year outcomes.
Mandatory disclosure requirements related to potential catastrophic events such as cyber incidents, emerging risks like PFAS, or litigation related to climate change could increase lawsuits involving corporate D&O and exacerbate concerns about loss severity.
