D&O Insurance Sharp Premium Growth Drives Loss Ratio Improvement

According to rating agency Fitch Ratings, several years of U.S director and officers’ (D&O) insurance rapid premium growth led to a material decline in 2021’s direct loss ratios, and it is expected that it may continue in the near term.

Source: Fitch Ratings | Published on March 29, 2022

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But, recent performance improvement and competitive factors are expected to temper further prices increases.

The analysts at Fitch warned that future claims will be affected by economic uncertainty, continued rising litigation and settlement costs, and the potential for losses to emerge in new areas, which includes cyber and environmental, social and corporate governance (ESG) related exposures.

Premium rate increases since 2H19 in response to unfavorable loss experience resulted in D&O premium growth being among the highest of US commercial insurance segments.

Direct written premium totaled $14.9 billion in 2021, a significant increase of over 130% from 2018.

Meanwhile, several rounds of pricing and underwriting prompted a 2021 turnaround in segment performance, with the industry direct loss and defense and cost containment (DCC) ratio improving to 64%, from an average of 75% from 2017–2020.

According to the Council of Insurance Agents & Brokers’ (CIAB) Commercial Insurance Market Survey, renewal premium rates averaged a 15% quarterly increase from 1Q20-4Q21, with a 13% increase in 4Q21.

Analysts at Fitch also said that D&O underwriters faced heightened claims from securities class action filings from 2017-2019, particularly from merger objections.

But, because of changes in both economic and judicial activity in response to the global pandemic, there was a more than 50% reduction seen in class action filings in 2021, compared to 2019, according to NERA Economic Consulting.

However, Fitch analysts warned that any future recessions that lead to higher corporate insolvencies and defaults, or a sharp market downturn, would likely spark a return to higher class action filings.

In addition, increases in merger activity in 2021, and expansion in new public offerings, particularly from the outsized growth in activity from special-purpose acquisition company’s (SPACs), may also be conducive for future class action filings in the event of a market correction.