Rating Agencies See Improvement in D&O Market, but Emerging Risks Threaten Profit

Rating Agencies See Improvement in D&O Market, but Emerging Risks Threaten Profit

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News Brief header U.S. directors and officers (D&O) insurers continue to see underwriting losses despite taking in more premium to correct years of competitive pricing and adverse claims trends, such as growing verdicts, settlements and defense costs, according to reports from two rating agencies.

According to Fitch Ratings and AM Best, D&O insurers increased direct premiums written in 2020 by 40%, following an increase of 20% in 2019. However, this did not stop the line of business from recording an underwriting loss for the fourth straight year in 2020. Per Fitch Ratings, the combined ratio over the same period was 107%.

According to AM Best, D&O insurers are adjusting limits, attachment points and retentions at renewal, while tightening policy terms and conditions. AM Best believes the market is improving. However, that improvement is not yet manifesting in performance. This is not surprising given the long-tail nature of D&O liability.

D&O not only faces more multimillion-dollar claims, but emerging risk trends. Cyber, employment practice, and environmental, social, and governance (ESG) concerns continue to put a spotlight on D&O underwriting and rates. In general, carriers in the D&O market face substantial losses due to years of relatively soft premiums. Additionally, the following factors continue to contribute to a challenging D&O market:

  • Adverse litigation and settlement trends, including higher jury awards
  • A rise in securities class action suits
  • A heightened risk of bankruptcies


Furthermore, the COVID-19 pandemic represents a new class of potential claims losses for D&O.

However, according to Fitch Ratings, these losses could take years to fully realize. “Allegations may arise for leadership of companies experiencing shareholder-value declines or insolvencies from the pandemic’s fallout,” Fitch Ratings said in a recent news release. “Claims may also be pursued against organizations that failed to protect employees or customers from exposure to the virus or serious illness.”

The pandemic also stalled court proceedings during forced shutdowns. The number of unsettled cases is another source of uncertainty for D&O insurers. Fitch Ratings and AM Best said the D&O’s direct loss and defense and cost-containment (DCC) ratio improved only slightly in 2020. The DCC ratio would likely have been higher if not for court closures. Further, the decline in 2020 may be an outlier and not representative of any positive development.

As a result of deteriorating D&O profitability, insurers continue to raise rates every quarter. In fact, the average rate increase of 14.7% in the fourth quarter of 2020 was more than double the 7.0% average rate increase in the fourth quarter of 2019. To learn more about D&O challenges and current market conditions, review these summaries from AM Best and Fitch Ratings.

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