More Complex D&O Risk Environment Pressures Underwriting Profits

Widening risk exposures coupled with multiple years of inadequate pricing are likely to put pressure on the profitability of directors and officers (D&O) insurance underwriting in the near term, according to A.M. Best.

A Best's Market Segment Report titled Expanding Risk Exposures Present D&O insurers with Significant New Challenges found that D&O direct premiums increased 10 percent in 2019 to $7.2 billion. While the industry's direct incurred loss ratio of 60.6 in the first three quarters of 2019 was lower than the loss ratio for the full year of 2018, the loss ratio over 2019's first three quarters was actually 5.5 points higher than for the same period in 2018.

According to A.M. Best, D&O insurers' underwriting results continue to deteriorate despite a recent push to charge a more sufficient premium for the exposures they're covering.

A.M. Best cited social inflation as one of the factors raising D&O costs, adding that an increasingly litigious environment has "provided fertile ground for an onslaught of claims in this segment." Allegations of sexual misconduct involving prominent corporate executives, media figures, politicians, and athletes have spurred loss creep from employment practices liability to D&O, A.M. Best said.

A.M. Best also noted that cyber security and the need to protect personal data from data breaches is now considered a key responsibility of senior management, increasing the exposure of D&O insurers to cyber-related claims.

Because of the complexities of different claims scenarios, D&O perils present clash potential, A.M. Best said, with companies possibly paying on employment practices liability or cyber coverage on top of D&O claims.

Noting the potential damage to brand and stock prices of companies that fail to adequately address climate change, A.M. Best advised corporate boards to enhance their understanding of the financial and reputational risks associated with environmental, social, and governance (ESG) issues and how they can affect business objectives and strategies.

Despite the changing D&O risk environment, A.M. Best said the D&O market remains highly competitive. Though in recent years the sector has seen little pressure to address rates to offset new D&O exposures, recently, prices have turned upward while insurers also tighten policy terms and conditions for different industry sectors and risk classes, A.M. Best said.