A key question in the U.S. directors and officers (D&O) insurance segment is whether carriers can sustain their recent, more favorable results given less aggressive pricing amid high social inflation and inflationary economic pressure, according to a new AM Best report.
The Best’s Market Segment Report, “Hard Market Gives Way to Changing Dynamics for D&O Insurers,” states that aggressive double-digit pricing increases in 2020-2021 benefited current bottom-line results. However, rate and price softening has become the norm and has led to declining premiums because of improving loss trends. In addition, competition in the D&O segment has risen, as established markets defend their positions on renewals and new entrants make their presence felt.
Despite decelerating pricing increases of between 7-8%, D&O liability direct premium written decreased to $9.7 billion for the first nine months of 2022 from $10.3 billion in the same prior-year period, driven by a decrease in exposure. With year-over-year D&O liability premiums dropping and resulting premiums growing at a level slightly below economic inflation, the segment could be susceptible to the continuing effects of social inflation on existing open claims.
“The pandemic-driven court backlogs has lengthened the tail on liability claims for D&O insurers. The high number of cases litigated and the duration of litigation may result in elevated legal expenses, raising defense and cost containment expenses. If social inflation drives an increase in ultimate incurred losses, D&O insurers’ bottom line would be impacted negatively,” said Christopher Graham, senior industry analyst, AM Best.
The number of IPOs declined dramatically in 2022, according to the report, down to just 110 from 968 in 2021. Just as the IPOs fueled premium growth over the prior two years, the substantial cutback in IPOs is a key driver behind the drop in D&O liability direct premium in 2022. Many companies that purchased D&O insurance for first-dollar coverage are instead buying only excess insurance, taking premium away from the overall marketplace.
“If severity does not improve as claims work their way through the court system, some insurers may find that the less conservative pricing 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,” said David Blades. associate director, industry research and analytics, AM Best.