The year 2021 marked the best year for directors’ and officers’ (D&O) insurers’ premium, volume and direct profitability since 2014, according to a new A.M. Best market segment report.
The report notes a trend among D&O insurers to reassess their desired risk classes and limit profiles to improve underwriting profitability.
In addition, the push for moderate to substantial rate and pricing increases fuelled top-line premium growth, with pricing increases in each quarter exceeding 10 per cent. A.M. Best anticipates this will remain near or at double digits throughout 2022.
Last month, WTW released its 2022 Directors’ Liability Survey, which found that price increases have generated interest in alternative solutions to the commercial insurance market for D&O liabilities, including captives, for some or all of the corporate reimbursement cover and company securities claims cover.
A.M. Best notes a reduction in defence and cost containment expenses, which only rose by 4 per cent in 2021, compared to 14 per cent in 2020 and 39 per cent in 2019. This reflects the prolonged abatement of litigious activity that arose from court closures in 2020, despite reopening in 2021.
However, A.M. Best states that the full effect of the COVID-19 pandemic on D&O and other long-tail professional and management liability lines will not be fully realised for some time, as claims are likely to lag occurrences or actions as the pandemic continues.
The report suggests that reopening of offices may see lawsuits from employees concerned about potential exposure to viral infections. A.M. Best adds that the extent to which D&O insurers will face these types of claims will also test the policies of employment practice liability insurers.
Looking to the future of the D&O insurance segment, A.M. Best anticipates further consolidation in an already concentrated market.
Furthermore, the potential for steady improvement in the market segment will depend on whether insurers remain “disciplined” amid a potential influx of capacity, by focusing on meeting rate adequacy needs and offsetting claims costs as they continue to rise.
The report also notes several specific emerging risks that are likely to continue stressing D&O insurers’ profit margins.
Regarding social inflation, D&O loss frequency is increasingly affected by the deterioration in public trust of large public companies. This has led to more plaintiff-friendly legal decisions and larger compensatory awards for cases that go to trial.
Higher D&O premium increases are also a result of emerging risks such as litigation financing, with other risk factors including the increase in sexual misconduct lawsuits and discrimination lawsuits, as well as ESG issues surrounding failure to disclose or address climate change risks.
Cyber continues as an emerging risk among the majority of lines. Corporate D&O responsibility for decision-making on how best to protect their company and client information from threat actors creates vulnerability to cyber exposure claims.
Special purpose acquisition companies (SPACs) are likely to continue to contribute to public company D&O liability, as they pose a unique risk for D&O insurers with potentially greater exposure to liability at each stage of the acquisition process. Litigants generally pursue actions alleging that the SPAC underperformed relative to expectations.
The report concludes: “Whether aggressive pricing increases and higher resulting premiums have sufficiently offset the complex prevailing risk factors for carriers insuring D&O risks remains unclear.
“As earned premium in 2022 reflects the benefit of the 2021 price increases, the D&O line’s bottom-line profitability in 2022 will indicate whether those actions were enough to generate true price adequacy and serve as a springboard for sustained improvement.”
