D&O Liability Market Pricing Increases as Tort Environment Shifts

Underwriting conditions in the US commercial lines insurance market have improved significantly in many segments in 2019, including directors and officers (D&O) liability. Several years of weaker performance driven by flat premium growth and less favorable claims trends in a shifting tort environment have spurred movement by insurers to restore profitability in this challenging line, according to Fitch Ratings.

Reductions in underwriting capacity and policy limits from several leading underwriters are contributing to larger rate increases. "The latest reports from global brokers indicate that double-digit year-over-year rate increases are not uncommon for recent renewals," said Jim Auden, managing director at Fitch Ratings. "As a result, D&O premium volume has turned positive for the first time after 4 consecutive years of relatively flat growth." Fitch projects industry statutory direct written premium will increase by 8 percent to 10 percent in 2019.

Heightened claims activity in several areas and rising defense costs and legal settlements remain a concern for D&O underwriters. A spike in securities class action filings in 2017 and 2018, particularly relating to merger objection claims, continues unabated in 2019. The D&O segment faces claims risk from multiple emerging sources including cyber risk and employment practices, from which higher risk of loss may also translate into greater demand for coverage, according to Fitch.

Statutory financial data from D&O supplemental filings reveal that the effects of rate increases may be taking hold. The industry direct loss ratio for the segment dropped to 57 percent in first-half 2019 from 62 percent in full-year 2017 and 2018. However, second-half results could be marred by continued recognition of less favorable claims experience and adverse loss reserve development.