D&O premiums in the US fall due to reduced demand – AM Best | Insurance business America
Reinsurers approach certain risks more cautiously
Occupational risks
By Kenneth Araullo
Favorable underwriting results in the U.S. D&O liability segment are likely to put downward pressure on interest rates due to lower demand, according to a new report from AM Best.
The underwriting performance of the U.S. D&O liability segment over the past three years has been favorable compared to 2017-2020. In 2023, the direct loss ratio was 50.8%, the best value in almost a decade.
After more than a decade of soft market conditions that resulted in undervalued D&O risks, a significant price increase from 2020 to 2022 resulted in a significant decline in the loss ratio in the monoline D&O business.
Strategic changes in underwriting practices suggest that the loss ratio could fall further in the short term. Insurers have avoided offering the high limits per risk that were common in the 2010s, which has contributed to unfavorable trends in claims levels.
AM Best noted that insurers have also refined their risk appetite, focusing on classes of insurance that they believe can be reasonably priced in the current market. Insurers are now adopting improved Enterprise Risk Management (ERM) strategies, resulting in smarter underwriting despite falling average premiums.
However, rising settlement and litigation costs, growing risks from new technologies and the expectation of further price declines in 2024 present challenges. These factors contribute to AM Best’s current negative outlook for D&O liability.
The segment’s recent positive performance is partly due to a decline in lawsuits against company directors related to initial public offerings (IPOs). The post-pandemic economic turmoil has caused initial public offerings to fall to their lowest level since the Great Recession.
According to the credit reporting agency, many lawsuits related to IPOs from the late 2010s and early 2020s are still being litigated. Social inflation continues to drive an increase in verdicts and settlements, creating uncertainty about claims from the 2017-2020 accident years and their impact on profitability.
Reinsurers are taking a more cautious approach to certain D&O risks, particularly financial institution risks. This caution could incentivize primary D&O underwriters to underwrite financial risks more conservatively, potentially improving long-term outcomes.
Improving economic conditions could create a favorable environment for initial public offerings and mergers and acquisitions (M&A). However, falling prices could impact the results of D&O liability insurers as IPOs and M&A increase.
Given recent strong underwriting results, the market is unlikely to bottom in 2024. The segment’s best year since 2014 suggests there is little pressure for insurers to raise rates. The decline in market segment premiums over the past two years is an example of supply and demand influencing pricing.
Lawsuits from previous years continue to go to court. Higher costs resulting from social inflation and factors such as increased legal advertising and third-party litigation financing could lead to an unfavorable development of loss reserves and reduce profitability in the current year. Emerging environmental liability issues such as PFAS or climate-related litigation could lead to more lawsuits against corporate boards and senior executives.
Geopolitical instability and supply chain disruptions could also trigger new lawsuits. If these factors increase claim frequency or severity, D&O insurers may need to quickly adjust their underwriting, pricing, claims processing and legal strategies to maintain recent favorable performance.
“After more than 10 years of weak market conditions in which most monoline D&O risks were undervalued, the significant price increase from 2020 and 2021 in particular led to a significant decline in the direct loss ratio,” said David Blades, deputy director of AM Best.
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2024-06-21 14:49:20
www.insurancebusinessmag.com
