US D&O market stabilises but relief may be short-lived: AM Best

The US D&O insurance market stabilised toward the end of 2022, after two years of hard market conditions, with pricing increases moderating, according to AM Best. D&O pricing by the end of 2022 appeared to range from flat renewals to modest increases – less than 5% on average.

Christopher Graham, senior industry analyst, AM Best, said this offered a reprieve for risk managers and brokers, “but whether this relief will have staying power or whether prominent risk factors render this dramatic turnaround short-lived is unclear. Any ensuing softer pricing has not extended to unprofitable accounts with inherently more hazardous exposures.”

Best noted that pricing increases in 2022 were barely enough to keep up with economic inflation, and fourth-quarter rate increases were even lower, adding that with pricing changes below economic inflation, the pendulum may be swinging back to rate inadequacy.

According to Best, from 2014 through 2019, competition muted the efforts of D&O underwriters to address pricing issues, causing results to deteriorate. These issues included expanding risk exposures faced by corporate directors and officers, particularly in public D&O, including social inflation; federal class action suits; litigation funding; and cyber risk.

Best said that higher rates and aggressive pricing increases in 2020 and 2021 attracted new capital to the market from strong underwriters, with new, creative approaches to public D&O underwriting, including surplus lines writers. The pricing increases and capacity strains of 2020 and later were driven by the roughly 400 annual federal securities class action filings from 2017 to 2019, said the ratings agency, but since then the number of filings has dropped steadily to the lowest level since 2014 – fewer than half the number of claims at the peak of 2017.

“However, current pricing could yield premiums that prove inadequate to cover potential claims owing to current economic risks, or evolving and expanding risks for which senior corporate officers could be held responsible,” said David Blades, associate director, AM Best.

Best noted that surplus lines historically have accounted for just under 7% of the D&O market, but in 2020 that increased to more than 10%. “Surplus lines writers have accounted for a large share of the growth in D&O over the past few years and have outperformed the admitted writers, at least on a calendar year basis, as they are unburdened by development on older losses, especially new carriers entering the D&O market,” said Best.

It added: “The direct loss ratio for business written by surplus lines insurers suggests the business has been profitable. With demand for D&O coverage falling, there was some movement back to admitted insurers in 2022, but the share of surplus lines’ D&O premium appears to be growing.”