AM Best Associate Director David Blades and Senior Industry Analyst Christopher Graham discuss a new report that reveals significant uncertainty remains around directors and officers (D&O) claims from the 2017-2020 accident years and their impact on future profitability.

Blades noted that over the decade leading up to 2020, competition in the market for directors’ and executives’ liability had driven prices to inadequate levels due to changing litigation exposures and risk landscapes.

“From about 2020 through mid-2022, we’ve certainly seen a sharp increase in average D&O renewal rates. What we’ve seen since then, over the last 18 to 24 months, is a clear downturn in the market,” he said.

Blades noted that recent results have been positive, but there are concerns about the sustainability of these results if prices remain weak.

“I think what we’ve seen is that companies have really tried to dig deeper into what they see in their portfolios in terms of the risks that their accounts face, and the specific risk categories that they write D&O liability insurance for,” Blades said.

Blades also pointed to rising settlement and litigation costs as major concerns, noting trends in increasing average settlement costs and overall litigation expenses.

“We’re looking at how insurers assess their risks and how they adjust their underwriting to address these types of risks,” he said. “I think there’s increased risk for directors and officers from a governmental, environmental, social and governance, or even cyber-related disclosure requirements. These types of disclosure requirements now place more risk on directors and officers.”

Social inflation and litigation funding are additional factors impacting loss trends. Expanding exposures related to government, environmental, social, governance and cyber-related risk disclosure requirements present additional challenges for directors and officers.

Read more: U.S. D&O Insurance Premiums Fall Amid Weak Demand – AM Best

Graham also emphasized that securities class action lawsuits are a major cause of losses in the D&O sector. The late 2000s saw a sharp increase in such claims, leading to higher losses and challenging market pricing.

“The concern now is that if you look at the number of class actions over the last five years, half of them are still open. As good as the results have been over the last couple of years for directors and officers cases, the number of cases that have been open for a few years is still a little bit concerning. All it takes is one or two cases to get a really big jury verdict, and that will impact not only that case, but also the settlement values ​​of all the other cases that are pending,” Graham said.

Graham noted that the decline in IPO activity over the past 18 months has led to a decline in demand for D&O insurance.

“So the demand for D&O will also be lower. Now, when these IPOs start to pick up again, what will happen? That’s an unknown. We don’t have a crystal ball to see that. But again, one or two instances could create an inflationary environment in settlements,” he said.

Graham also explained that surplus line companies have increased their market share in the D&O segment from 6%-7% to about 10% since the pandemic, driven by challenging market conditions.

“Whether it’s raising rates on the business they already have or taking on new policies, they now have about 10% of the market in terms of premium and even with the premium coming down in the last couple of years, they’re still maintaining that 10% level,” he said.

“They are holding their market share fairly well, and because they came into the market and didn’t necessarily suffer the losses that other carriers have, their calendar year results have actually been better than the industry as a whole,” Graham said.

Blades also acknowledged concerns about uncontrolled pricing, particularly with regard to loss reserves for old claims, and noted that negative developments in open claims from 2017 to 2020 are being monitored.

“The fact that pricing has been relatively weak over the last 18 to 24 months, if these old accident years of claims are resolved and we start to see claims settlement numbers start to trend upward, that could threaten the recent positive direct underwriting results,” Blades said.

AM Best closely analyzes single-line results and reserve practices to determine the sustainability of recent positive results at current prices.

“That would let us know, and that would let the market know, that the recent positive results may not be sustainable at current prices. That’s certainly something we’re looking at, and something we should be concerned about as we look at the D&O liability market over the medium term,” Blades said.

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