D&O Insurance 1H22 Results Improve, Premium Growth Stalls

According to Fitch Ratings, the U.S. Directors & Officers (D&O) insurance line has experienced some of the most pronounced pricing increases among all commercial lines over the last three years, with shifts in underwriting practices such as lower limits, higher retentions, and more coverage exclusions fostering improvement in financial performance.

Source: Fitch Ratings | Published on September 2, 2022

D&O insurance rates

These trends, however, are fading, resulting in a decrease in both rate momentum and premium volume in 2022. Recent entrants' expansion of underwriting capacity and potential claims volatility from multiple sources reduce the likelihood that current underwriting gains will last.

According to industry aggregate statutory supplement data, D&O segment performance continued to improve in 1H22, with the direct loss ratio falling to 53.4% versus 54.7% for full-year 2021. This figure corresponds to a direct combined ratio in the mid to high 90% range. This improvement was aided by a 22% increase in earned premiums over the first half of the year and relatively stable loss experience.

After more than 130% market direct written premium growth from 2018 to 2021, growth has begun to reverse in 2022, with premium volume down 2.7% year on year in 1H22, and a flat to negative trend likely to persist in the near term.

Many commercial insurance segments continue to see positive rate momentum, but D&O pricing has recently moderated significantly. Aon's quarterly D&O market index fell by 0.5% in 2Q22 for primary policies renewing with the same limit and deductible, compared to a 14.2% increase the previous year.

Long-term profitability is dependent on pricing levels keeping pace with loss trends, which are likely to be less predictable and may rise as inflation and economic growth slow.

The results of professional liability underwriters have benefited from a class action litigation filing volume that remains significantly lower than pre-pandemic levels. According to Cornerstone Research, the 227 class action filings for the fiscal year ending June 30, 2022 are 47% lower than the previous record levels reported for the full year 2019.

However, the risks associated with D&O claims and litigation from a weaker economy have yet to materialize. A severe economic downturn, complete with sharp equity market declines and an increase in corporate insolvencies and failed mergers, provides ample fodder for D&O claims. A greater number of lawsuits are also expected in connection with the activities of less transparent special purpose acquisition companies (SPACs). Other risks, such as hiring practices, cyber threats, climate risk, and cryptocurrencies, may also contribute to future D&O losses.

Another unknown variable is the effect of higher general inflation on social inflation and litigation cost trends. The recent profit recovery of D&O writers was largely based on a return to rate adequacy, which protects against a near-term increase in claims costs. However, less appealing competitive conditions may prevent the necessary underwriting actions from being taken to offset loss experience in the long run.