D&O market to soften further in 2024

D&O rates are expected to fall further in 2024 as insurers fight over a smaller pool of premium, although an uptick in insolvency claims may yet check market softening, brokers have told Commercial Risk.

The D&O market was good for buyers last year, with premium savings available again, according to Tom Lazell, executive director for D&O at broker Arthur J Gallagher in London. Insurers had hoped 2023 would be more stable following big price decreases in 2022, the first year of a softening market. “But it has ended up being a lot more aggressive than that, particularly for risks that were opportunistically priced in previous years,” said Lazell.

D&O accounts written in the London market experienced double-digit rate decreases on average in 2023, with the level of softening dependent on industry and geography, according to Stephanie Manson, head of management liability at Marsh in London. “Overall, the market is decreasing and there is no sign of that stopping at the moment,” she said.

Through the end of Q3 last year, D&O pricing for public companies was on average down 18%, according to Manson. “Premiums are still up substantially on 2017 and 2018 levels. At the beginning of 2023 we were showing eight time those levels. So we will still be multiples up on the previous market low,” she said.

While prices are expected to continue moderating in 2024, the severity of decreases may flatten out, said Manson. “There are some signs that insurers with larger D&O books are beginning to rationalise where they are giving those decreases, and in some instances walking away where they think pricing is getting too low. That is still very limited, but we are starting to see some of that behaviour,” said Manson.

To some extent, the D&O market is winding back on the overcorrection in the hard market and from concerns about economic and geopolitical uncertainty, according to Manson.

“Accounts that went up dramatically are now coming down quite dramatically. Previously we saw a lot of uncertainty built in, but given the seeming resilience of the economy, a lot of those companies have done relatively well. Increases in insolvency levels are weighing heavily on insurers, but where companies can show they are not a particular insolvency risk, and that they are able to weather the storm, they are seeing rates fall fastest,” she said.

Supply currently exceeds demand for D&O insurance, continued the broker. “Insurers are trying to hold on to renewal business, even as the premium goes down, but also the overall premium pool is smaller,” she explained.

“We have more supply in the market, at a time when buyers have rationalised their demand. Many insureds could not buy the limit they wanted in the hard market, and some intentionally took their limits down. While some D&O buyers are increasing limits now that they can, we see quite a few stick on reduced limits from the hard market, which is exacerbating the situation,” said Manson.

D&O capacity has continued to increase, with no notable withdrawals from the market, and even a few new entrants in London, according to Lazell. At the same time, line sizes of $10m per insurer are now considered the norm, having fallen to $5m in the hard market, he said.

D&O insurers are also increasing the number of ancillary lines they offer – such as crime, employers’ practices liability and pensions trustee liability – as they look to generate additional income and secure lines on D&O programmes, explained Lazell.

Lower demand and falling rates have left many D&O insurers behind premium budgets, which has added further downward pressure to pricing, he continued.

“Insurers did not expect rates to fall as quickly as they have. They didn’t expect such an oversupply of capacity, while subdued capital markets mean there hasn’t been as many big deals coming to market through IPOs and big transactions. So insurers have been fighting over the business that is out there, and we have seen a bit of a race to the bottom,” he said.

“It will be interesting to see how the next few years pan out. There continues to be challenging macroeconomic headwinds for companies to navigate, with increased interest levels paid on debt, high inflation, wage increases, supply chain issues and falling customer demand,” said Lazell.

Rates are likely to soften further in 2024, although the outlook for the D&O market is difficult to predict, he continued. “If capital markets gain traction in 2024 then it will help market conditions. Otherwise, we would expect low double-digit decreases, lower than 2023 but higher than most insurers would ideally like,” he said.

“We have seen some insurers step away from risks where the premium reductions have been too large. Insurers say they will do this but on most occasions they don’t. They all face pressure to maintain and grow their books, and to make budgets. But as the year goes on, it gets difficult to maintain that stance and let premium walk out the door,” said Lazell.

The tough economic environment is starting to feed through to corporate insolvencies, which are an important driver for D&O claims, and therefore potentially future pricing, explained Lazell.

“There is a bit of a lag, but we would expect [insolvencies] will turn into claims. There have been more [insolvency-related claim] notifications in 2023 than previous years, and when these turn into litigation, which inevitably they will, we expect market conditions might start to change if insurers are losing money and premium levels are at unprofitable levels,” he said.

There is concern among D&O buyers that market softening could go too far, and result in another sharp market correction down the line. “For clients, they are not happy about the prospect of volatility in pricing. Most would like some level of stability and predictability from the D&O market. While everyone likes saving money, no one would welcome a dramatic decrease that then led to a dramatic increase,” said Manson.

But despite price decreases in 2023, the D&O market is still profitable, he added.

“I think insurers will still do well in 2023. There was something of an over-correction in the hard market, and there is room to come down to price adequacy… I do not think anyone would argue the D&O environment is benign, claims are still down. The number of US securities class actions – the most severe of D&O claims – remain down from the years that created the hard market,” said Manson.

That said, rising defence costs are hitting lower insurance layers, according to Manson.

“While there are fewer cases, those cases cost more. A large part of what gets paid in D&O is in defence costs, and with inflation, lawyers’ fees have risen dramatically these last two years. Even with a claim dismissed at an early stage without an indemnity payment, insurers’ loss for the defence have increased in recent years. So primary layers are most likely to pay those defence costs, and we are seeing some signs of that firming a little,” she said.