US D&O insurance segment draws negative outlook from AM Best

Industry's aggregate premium down for six quarters

US D&O insurance segment draws negative outlook from AM Best

Professional Risks

By Terry Gangcuangco

With the industry’s aggregate premium for directors and officers (D&O) insurance in the US down for six quarters amid heightened competition, credit rating agency AM Best has assigned a negative outlook to the market segment.

It cited greater capacity and falling prices resulting from growing competition, while market headwinds are also being driven by regulatory pressures around ESG (environmental, social, and governance) costs, growing exposures from new technologies, and rising settlement dollars and litigation expenses.     

Notably, D&O liability premium is down almost 20% from 2021’s peak due to declines in demand for transactional coverage, initial public offerings, and pricing.

“D&O direct premiums written (DPW), after peaking at $14.9 billion in 2021, have declined the past two years, as AM Best estimates $12 billion in DPW for full-year 2023,” reads part of the AM Best report US D&O: Not Out of the Woods Yet Despite What Declining Rates Imply. “Despite the drop in written (and earned) premium, the loss ratio for the line has also fallen, reflecting the realized benefit of the substantial up-pricing of renewals and new business from 2020 through early 2022.

“The direct loss ratio of 51.5 through third-quarter 2023 is on track to be the lowest in nine years, improving the industry’s underwriting performance. AM Best believes that, if results remain favorable on a calendar year basis, additional capacity may flow into the D&O market.

“The number of IPOs in 2023, 72, was the lowest since 2009, during The Great Recession. The uncertain, post-pandemic economic environment has made IPOs less attractive. Not only are IPOs down, but the method of taking companies public has also changed.”

It was also noted that D&O insurers’ prior accident year reserve development could become adverse in light of the impact of economic inflation, social inflation, and litigation funding on the ultimate disposition of cases.

In Market Segment Outlook: US Directors and Officers Liability Insurance, AM Best said: “As the cost of litigation continues to rise, companies are becoming more likely to explore settlement opportunities even in cases when the facts may be on their side. According to Woodruff Sawyer, total settlement dollars during the first half of 2023 were up slightly over 29% year over year, with a 33% rise in settlements over $20 million than in the same period in 2022.

“These results are further influenced by the rising impact of litigation funding arrangements, which, even with a potential increase in disclosure requirements, appear to be a permanent part of the landscape.”

What do you think about this story? Share your thoughts in the comments below.

Related Stories

Keep up with the latest news and events

Join our mailing list, it’s free!