US D&O Insurance Is Profitable Despite Pricing Decline

The US directors and officers (D&O) liability insurance sector continues to generate favorable underwriting results, even as written and earned premium volumes decline in a softening market, according to Fitch Ratings.

Property and casualty industry data shows an 8 percent year-over-year drop in D&O direct written premiums as of June 30, 2024, with direct earned premiums decreasing by 16 percent. These figures follow the previous year's declines of 15 percent and 12 percent for written and earned premiums, respectively.

The direct loss ratio for the D&O segment rose slightly to 51.2 percent for the first half of 2024, up from 50.7 percent for the full year of 2023. Despite the pricing challenges, this aligns with an estimated mid-to-high 90 percent direct combined ratio.

D&O insurers are still benefitting from significant price increases and revised underwriting practices from 2019 to 2021, which contributed to the segment's profitability. However, market improvements have led to increased underwriting capacity and price competition, which are trends that are expected to continue in the near term. Notably, D&O pricing trends differ from those in other US commercial insurance lines, which have seen modest price increases.

Aon's D&O market index reveals that premium rate changes for primary policies turned negative in the second half of 2022. The decline has accelerated, with second-quarter 2024 rates falling by 6.5 percent compared to 5.5 percent in the first quarter. This downward trend could impact D&O insurance's profitability in the future.

Federal securities class-action litigation filings, a key driver of D&O claims, have dropped by roughly 45 percent from prepandemic levels in 2019. This is primarily due to fewer merger-objection claims, according to NERA Economic Consulting, which expects filings to remain slightly below 2023 levels for the rest of 2024.

Assessing when D&O pricing becomes insufficient to deliver adequate returns on capital remains challenging. Periods of rising claims, often linked to stock market declines, economic recessions, or heightened merger activity, typically reveal pricing deficiencies. Other risk areas that could spur D&O claims include regulatory and compliance issues, employment practices, cyber threats, climate risk, and cryptocurrencies.