AM Best issues negative outlook for US D&O segment as rates fall

Growing competition in the US D&O market is a key factor that has led to more capacity and lower pricing, according to AM Best, and as a result the ratings agency has assigned a negative outlook to the segment. Other factors fuelling headwinds for the US D&O market are rising legal expenses, growing exposures from new technologies, and regulatory pressures around ESG costs. “The current pricing environment may prove unsustainable based on developing losses and how those losses affect company underwriting results prospectively,” said Elizabeth Blamble, senior financial analyst, AM Best. Best said that premium in the D&O segment is down almost 20% from its peak of $14.9bn in 2021. Decline in demand for transactional coverage, IPOs, and pricing are also driving premium down. Best estimates that premium for full-year 2023 will reach $12bn. The direct loss ratio through third-quarter 2023 was 51.5 and is on track to be the lowest in nine years. “If results continue to be favourable and prior accident year reserve development does not begin to trend adversely, additional capacity may flow into the D&O market,” said David Blades, associate director, AM Best. However, social inflation, litigation funding, and broadened underwriting terms could mean D&O insurers may experience adverse prior year loss reserve development and a deterioration in calendar year profitability. US corporate directors and officers have faced numerous challenges in the past several years, including inflation and interest rate risk, equity market volatility and adverse legal trends related to social inflation and litigation funding. The rising cost of litigation related to these risks has made managing loss frequency and severity trends difficult for D&O insurers, said Best. It noted that additional capital has entered the D&O market from new carriers as well as existing carriers seeking to expand their writings. The plummeting number of initial public offerings meant that the demand for coverage has dropped. Concurrently, companies entering the market that are unencumbered by legacy claims continue to grow market share, which has resulted in highly competitive conditions with supply outpacing demand. Best noted that consistently poor results led insurers to begin raising prices in earnest in 2019, but said this was short lived. “With results levelling out and demand for transactional liability coverage declining, average pricing on D&O accounts has since fallen dramatically. However, there are concerns that pricing may have swung too quickly in the other direction. Price increases through much of 2022 were moderate and did not keep pace with economic inflation. At the same time, court closures due to the pandemic may have slowed the progress of lawsuits towards settlement or adjudication,” said Best. It added: “In light of the impact of economic inflation, social inflation, and litigation funding on the ultimate disposition of these cases, D&O insurers’ prior accident year reserve development could become adverse.”

AM Best issues negative outlook for US D&O segment as rates fall

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