Despite Premium Hikes, Challenges Persist for US D&O Insurers

While rate increases have led to considerable premium growth in the US directors and officers (D&O) insurance market, insurers' loss ratios have yet to show improvement, according to a recent report from A.M. Best.

In a Best's Market Segment Report, titled "D&O Insurance: Fundamental Problems Persist Despite Pricing," the rating agency noted that through the first three quarters of 2021, the growth rate of direct D&O premium compared with the previous year was on par with growth seen in 2020 over 2019.

Projected direct D&O premium written for 2021, based on the actual premium written of $14.6 billion as of September 30, is more than double that for 2018, demonstrating considerable momentum for the line, A.M. Best said.

Still, even as premium has risen by an average of 15 percent over the last six quarters through 2021's third quarter, US D&O insurers' direct loss ratio has worsened.

According to Best's report, the increase in US D&O insurers' costs is not limited to losses. Defense and cost containment expenses for D&O liability, primarily for legal expenses, are also increasing, Best said. The rating agency attributed high D&O premium increases over the past few years to emerging risks as well as the expanding influence of social media.

"Market observers have noted that D&O trends reflect the growth of what is being termed a new global investment class related to litigation financing, epitomized by the funding of group securities class action suits," a Best statement said. "Additional risk factors such as sexual misconduct lawsuits, discrimination cases, and the failure to disclose or address climate risks are all contributing to the uptick in D&O lawsuits, settlements, and payouts—and leading to higher premiums."

"The effects of the rising costs of insurance claims are not only felt by insurers relative to their claim payouts and loss ratios but also policyholders and how much they pay for coverage," Christopher Graham, senior industry analyst of industry research and analytics at A.M. Best, said in the statement. "This is a particularly acute problem for larger, public companies."

Best's report noted that the pace of securities-related litigation could increase in 2022, as plaintiffs target special purpose acquisition company (SPAC) transactions, cryptocurrencies, or event-driven lawsuits.

"The growth in SPAC-related litigation also has played a role in the coverage and cost of D&O insurance," David Blades, associate director of industry research and analytics at A.M. Best, said in the statement. "The number of insurers in the market who are willing to write D&O coverage for SPACs has been somewhat scarce—and less coverage and higher costs leave the management of the SPACs and the resulting entity at risk of being inadequately protected from liability exposures."

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