AM Best: Results May Not Justify the ‘Optimism’ on D&O Pricing

Recent rate softening in the directors and officers (D&O) liability line may result in an insufficient premium base in the months ahead, AM Best wrote in a new commentary.

Source: Advisen | Published on February 21, 2023

D&O insurance rates not sustainable

Recent rate softening in the directors and officers (D&O) liability line may result in an insufficient premium base in the months ahead, AM Best wrote in a new commentary.

In 2021 and 2022, the D&O market showed signs of plateauing. Double-digit rate increases and an IPO-friendly environment in 2020-2021 boosted premium growth. Pricing increases began to slow significantly last year, and new market capacity restricted potential price hikes.

Despite continued pricing increases between 7% and 8%, D&O premiums written dropped to $9.7 billion in the first nine months of 2022 from $10.3 billion over the same period in 2021. The number of IPOs also dropped dramatically in 2022, down to 110 from 968 in 2021, contributing to the drop in D&O premiums written.

However, less-aggressive pricing could prove insufficient given continued social inflation and economic pressure on loss cost trends, Best warned.

“The key questions appear to be how sustainable the recent, more favorable results are based on current pricing trends, and where they will lead the market in 2023 and over the near-term,” Best wrote.

Court backlogs present a problem for the D&O segment, leaving losses more open to economic and social inflation. These and other factors “could lead to adverse development on open claims from prior years,” Best wrote.

In light of decelerating premiums and expanding capacity, insurers “are feeling bullish” about the D&O market, observed Best. Insurers believe the premium base resulting from 2020-2021 aggressive pricing is sufficient to offset rising claims costs. Some carriers have even expanded their capacity on renewals or offered reductions on retentions for insureds with favorable claims histories.

Whether this optimism is justified won’t be known until full-year claims severity trend data is available, according to Best.

“If severity does not improve as claims work their way through the court system, some insurers may find that the less conservative stance taken during 2022 and into 2023 is not supported by actual results and could cause the winds of change to blow in a direction that is once again not favorable for policyholders,” Best wrote.

Directors and officers also face headwinds on cybersecurity and environmental, social, and governance (ESG) issues. Increasing severity and frequency of cyberattacks could result in more D&O claims as the strategies of company leadership are called into question, according to the report. Shareholders, activists, and the public are holding directors and officers accountable for upholding their commitments to ESG initiatives.