After two years of hard market conditions, the U.S. directors and officers (D&O) insurance market stabilized toward the end of 2022. AM Best noted that pricing increases moderated and renewal pricing was flat on average indicating the stabilisation.
In 2022, D&O liability coverage was one of the property/casualty lines that were most under pressure. The Best’s Special Report, “US D&O: Increased Capacity, Declining Demand, Lead to Softer Pricing” notes that this came on due to higher rates and aggressive pricing increases in 2020 and 2021, which attracted additional capacity, much of it from surplus lines insurers.
Previously, the competition had muted the efforts of D&O underwriters to address meaningfully the issues causing results to deteriorate. These issues included expanding risk exposures faced by corporate D&O, particularly in the public sector, including social inflation, federal class action suits, litigation funding, scrutiny of ESG-related disclosures and cyber risk.
The strong rate environment in 2020 and 2021 attracted new capital to the market from strong underwriters with new, creative approaches to public D&O underwriting, explains the rating agency.
David Blades, the Associate Director of AM Best, said, “However, current pricing could yield premiums that prove inadequate to cover potential claims owing to current economic risks, or evolving and expanding risks for which senior corporate officers could be held responsible.”
According to the report, D&O pricing by the end of 2022 and moving forward in 2023 appeared to range from flat renewals to modest increases, less than 5% on average, offering a reprieve for both risk managers and brokers.
Christopher Graham, Senior Industry Analyst at AM Best, said, “But whether this relief will have staying power or whether prominent risk factors render this dramatic turnaround short-lived is unclear. Any ensuing softer pricing has not extended to unprofitable accounts with inherently more hazardous exposures.”
Although the report suggests that softer pricing has not extended to unprofitable accounts with potentially riskier exposures due to cyber and disclosures about environment, social, and governance/ESG factors. A drop in IPOs has also led to a decline in demand for D&O coverage for these exposures, which had been substantial in prior years, and contributed to the moderation in pricing.
The report names some of the emerging and evolving issues such as market volatility, banking failures, and D&O coverage inflation over the past 18 months. Interest rate hikes to fight inflation and market volatility have created negative pressure on stock prices and funding for privately held companies, which could result in shareholder and derivative actions.
The failures of Silicon Valley Bank, Signature Bank, and Republic Bank have led to intense scrutiny of banks’ executive leadership and boards of directors, although no suits have been filed as of yet. Public officials have pointed to unsuccessful or inadequate risk management in identifying and managing interest rate risk and liquidity risk, as well as overexposures to certain industry sectors amid sharply rising interest rates, as reasons these banks failed.
Another factor is the excess coverage concerns, the competition for D&O liability coverage has become more intense for excess layers. When the market was the hardest in 2020 and 2021, average rate and pricing increases for excess layers also rose, reflecting the impact of social inflation and nuclear verdicts that had caused loss severity to spike.
With higher prices attracting additional insurers to the market, some of that new capital is being deployed in the excess market, further commoditizing the product, according to the report. For new businesses, unless their teams include veteran D&O underwriters with prior experience with other carriers, gaining traction in the primary market competing against insurers that have had a long-time market presence may prove challenging.
Given the volatility in the market because of the significant renewal price changes when pricing was more volatile, many risk managers and insureds prefer carriers with long-term market capital and experienced claims administrators to be on the primary and first excess layers of their programs.
