U.S. D&O Insurers Brace for Pandemic-Related Losses

Underwriting losses are expected to continue over the near term for the U.S. directors & officers (D&O) liability insurance segment as claims amid the economic fallout from the pandemic emerge, which will take several years to fully pay out, Fitch Ratings says. However, there is limited risk to ratings of individual insurers from the D&O segment tied to pandemic-related claims as carriers with significant D&O premiums are larger, diversified entities. The recent sharp changes in the underwriting environment and pricing are supportive of improving profitability post-pandemic, which will also depend on the path of the economic recovery.

Source: Fitch | Published on September 28, 2020

D&O insurance rates

D&O insurance is a niche segment in the U.S. insurance market that receives considerable attention, largely due to outsized losses related to prominent corporate events or allegations, including bankruptcies, accounting irregularities or restatements, mergers & acquisitions or management malfeasance.

Underwriting performance for the segment has been negatively affected by many years of competitive pricing and ongoing increases in multimillion-dollar jury verdicts and claims settlements, as well as growing defense-related costs. Fitch estimates the D&O has reported statutory underwriting losses for three consecutive years from 2017 through 2019, including a 106.6% direct combined ratio in 2019.

Despite renewal rate pricing skyrocketing, results remain under pressure with the direct incurred loss ratio rising to 62% at 1H20, the highest midyear level in 10 years. The Council of Insurance Agents & Brokers commercial market survey indicates that D&O renewal rates moved 16.8% in 2Q20 versus a 4.3% increase in 2Q19. Rates on excess coverage layers are increasing at a higher rate.

Direct written premiums increased by 22.5% for 1H20 YoY, with pricing momentum poised to propel revenue growth through 2021. Changes in underwriters' risk appetite are leading them to raise insured retentions and lowering policy limits offered that are creating challenges in placing excess layers and larger programs.

The ongoing coronavirus pandemic represents a new vein of potential claims losses for insurers in several casualty segments, particularly D&O. Allegations may arise for leadership of companies experiencing shareholder value declines or insolvencies from the economic fallout of the pandemic. Claims may also be pursued against organizations that failed to protect employees or customers from exposure to the virus or serious illness. Entities creating protective products or vaccines to prevent the virus or treatments for afflicted individuals that prove ineffective also face unique new D&O exposures.

In recent years, D&O claims have also emerged in areas including cyber events and employment practices matters where alleged negligence or poor governance practices effected corporate reputations or generated material financial losses. These can lead to more allegations of a lack of management oversight of information system security and lax risk management. Class action filings related to cryptocurrencies are also a recent phenomenon.

P/C insurers with exposure to D&O underwriting are typically larger multiline insurers that can absorb or offset potential losses with results from other segments. It is usually offered as part of a suite of product offerings, representing approximately 1% of total industry direct premiums. At YE19, the 10 largest D&O writers held a combined 67% share of all direct statutory premiums, and only 37 individual organizations wrote greater than $10 million of D&O direct premiums.