D&O direct written premium volume increased to $10.7 billion in 2020. After several years of flat to declining revenue growth, premiums increased by a remarkable 40% in 2020 and 20% in 2019. However, underwriting performance measures did not reflect similar improvement.
The industry direct incurred loss and defense and cost-containment (DCC) ratio declined modestly to 74% in 2020. Deterioration in results for the last four years is evidenced by a loss & DCC ratio averaging 75% from 2017-2020, in contrast with a 61% average during 2011-2016.
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 1.5% of total industry direct premiums. At YE20, the 10 largest D&O writers held a combined 64% share of all direct statutory premiums, and only 25 individual organizations wrote greater than
$100 million of D&O direct premiums.
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 that D&O has reported statutory underwriting losses for four consecutive years from 2017 through 2020 with a direct combined ratio average of 107% over that timeframe.
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.
The ongoing coronavirus pandemic represents a new class 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 pandemic’s economic fallout. 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.
Pandemic-related D&O claims losses will likely take several years to fully measure and resolve. However, the likelihood that risks from the D&O segment tied to recent claims experience, potential reserve weakness or pandemic-related claims will drive individual insurer ratings downward is limited. The sharply improving pricing environment portends a potential for post-pandemic profit improvement.
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 affected 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.