The profitability of directors and officers (D&O) insurance underwriting is likely to remain under pressure in the near term, due to factors that include multiple years of inadequate pricing and widening risk exposures, according to a new AM Best market segment report.
The Best’s Market Segment Report, titled, “Expanding Risk Exposures Present D&O Insurers with Significant New Challenges,” states that D&O direct premiums written increased by 10% in 2019 to $7.2 billion. The industry’s direct incurred loss ratio of 60.6 for the first three quarters of 2019 was lower than the full 2018 loss ratio — but 5.5 points higher than the 55.1 loss ratio for the first three quarters 2018. According to the report, the calendar-year results often paint a rosier picture in terms of performance, as quarterly loss ratios reflect just direct incurred losses and not the expenses related to the defense, litigation or claims cost containment. Nevertheless, underwriting results continue to deteriorate despite the recent push to charge a more-sufficient premium for exposures covered.
Social inflation is one of a number of factors that has gained momentum in the past decade and raised D&O costs. The report states that an increasingly litigious environment has provided fertile ground for an onslaught of claims in this segment. Allegations of sexual misconduct involving people in powerful positions —prominent corporate executives, media figures, politicians and athletes — have spurred loss creep from employment practices liability to D&O. Cybersecurity and protecting personal data from potential breaches also are now considered key responsibilities of senior management, thus increasing the exposure of a carrier’s D&O insurer to cyber-related claims. Because of the complexities involved with different claim scenarios, D&O perils present clash potential and companies could end up paying on employment practices liability or cyber on top of D&O claims.
Companies that fail to address climate change also may see their brands suffer and stock prices drop. Corporate boards are well-advised to enhance their understanding of the financial and reputational risks associated with environmental, social, and governance (ESG) issues and how they can affect business objectives and strategies throughout an organization. ESG risks include revenue declines, reputational damage and missed opportunities for cost-savings or tapping into emerging markets.
Despite the challenges presented by changing risk dynamics, the D&O market remains highly competitive. Insurers migrated to the segment attracted by its historically positive underwriting results. Over the last several years, the segment has seen risks rise without much pressure to address rates to offset these new exposures. More recently, upward pricing has taken place and has continued into 2020, and insurers have tightened policy terms and conditions for different industry sectors and risk classes, as they reconsider their appetites and limits when underwriting different types of public, private and nonprofit companies. Still, factors such as social inflation have compounded the complexities of this market, and created a minefield of potential litigation for professional liability.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=294657.
AM Best will host a complimentary webinar on March 2, 2020, at 10 a.m. (EST), on the state of the D&O insurance sector with the authors of this report and industry participants. To register, please visit www.ambest.com/webinars/diroff.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.
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