AM Best associate director David Blades and senior industry analyst Christopher Graham discussed a new report that reveals significant uncertainty remains about directors and officers (D&O) claims from accident years 2017-2020 and their impact on future profitability.
Blades noted that for a decade before 2020, market competitiveness for D&O liability drove rates to inadequate levels due to changing litigious exposures and risk landscapes.
“From the period of about 2020 to maybe mid-2022, we definitely saw a spike in average rates on renewals for D&O liability risks. What we've seen since then, over the past 18 to, I guess, maybe 24 months, is decided softening in the market,” he said.
Blades indicated that recent results have been favorable, but there is concern about the sustainability of these results if rates remain soft.
“I think what we've seen is that companies have really tried to dig into what they see in their portfolios in terms of the risks that their accounts are facing, and at the specific risk classes, for which they are writing D&O liability insurance,” Blades said.
Blades also identified rising settlement and litigation costs as key concerns, noting trends in increasing average settlement costs and overall litigation expenses.
“We are looking into how insurers are really assessing … their risks and how they're adjusting their underwriting toward, against those types of exposures,” he said. “I think there are expanding exposures that are on the plate of directors and officers from the standpoint of disclosure requirements for government, environmental, social, and governmental oriented risks, or even cyber-related risks. Those kinds of disclosure requirements present, put more risks for directors and officers.”
Social inflation and litigation financing are additional factors influencing loss trends. Expanding exposures related to disclosure requirements for government, environmental, social, and governance (ESG) risks, and cyber-related risks present further challenges for directors and officers.
Graham also highlighted that securities class-action litigation is a major driver of losses in the D&O segment. The late 2010s saw a spike in such claims, leading to higher losses and hard market pricing.
“The concern now is that you still have, if you look at the number of class-action claims over the past five years, half of them are still open. As much as the results have been good for the last couple years for D&O, the number of open cases from a few years back is still a little worrisome. All it would take is one or two cases to have a really large jury verdict, and that will affect not just that case, but the settlement values of all the other cases that are waiting,” Graham said.
Graham noted that decreased activity in the IPO sector over the past 18 months has reduced demand for D&O insurance.
“With that, there's less demand for D&O as well. Now, when those IPOs start picking up again, what's going to happen? That's an unknown. We don't have a crystal ball to see that. But again, one or two cases could create an inflationary environment on settlements,” he said.
Graham also explained that surplus lines carriers have increased their market share in the D&O segment from 6%-7% to about 10% since the pandemic, driven by hard market conditions.
“Whether it be raising rates on the business they already had or getting new policies, they do have now about 10% of the market by premium and even as the premium dropped off in the last two years, they still maintain that 10% level,” he said.
“They're holding their market share pretty well, and because they came in and didn't have necessarily the legacy losses of the other carriers, their calendar year results have actually even been better than the segment as a whole,” Graham said.
Blades also acknowledged concerns about soft pricing, especially related to loss reserves for older claims. He noted that adverse development on open claims from 2017-2020 is being monitored.
“The fact that the pricing has been relatively soft over the past 18, 24 months, if these older accident year claims are resolved, and we start seeing the claim settlements numbers start trending higher, that could threaten the recent, favorable direct underwriting results,” Blades said.
AM Best is closely analyzing monoline results and reserve practices to determine the sustainability of recent favorable results at current prices.
“That will let us know, and that will let the market know, that the more recent favorable results could be unsustainable at present prices. That is definitely something that we're looking at, and it is something to be concerned about as we look at the D&O liability market over the medium term,” Blades said.
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