US D&O Insurance Premium Declines May Not Reflect Risk Environment

A new AM Best commentary suggests that the ongoing decline in US directors and officers (D&O) liability insurance premiums may not align with the persistent risks in the market.

The corporate D&O segment continues to face challenges stemming from economic uncertainty, artificial intelligence, an evolving legal landscape, climate risks, and shifting public sentiment. According to the commentary, "US D&O Market Liability Premium Declines are Likely Inconsistent with the Risk Environment," these factors contributed to the sharp rise in renewal premiums for D&O insurers in 2020 and 2021. However, since 2022, new capacity has entered the market, attracted by prior premium increases.

"This has led to significant declines in pricing for D&O liability," said David Blades, associate director, AM Best. "As we near the end of the first quarter for 2025, renewal premium has continued to fall despite some insurers acknowledging that while claims from prior years have developed in alignment with expectations in some cases, in other cases reserves have developed more adversely than anticipated."

Direct monoline D&O premium written through September 30, 2024, has declined year over year for 10 consecutive quarters. Despite this, improved underwriting performance, tighter contractual language, and more selective risk acceptance have led to more favorable direct loss ratios in recent years. D&O underwriters continue to benefit from the market corrections that took place between 2019 and 2021, which included higher rates and more conservative underwriting practices.

Even with recent underwriting improvements, the prolonged period of lower pricing could weaken D&O insurers' financial performance by reducing the premium base needed to support future claims.

"We believe that insurer calendar-year results could soon be affected by adverse development embedded in prior accident-year incurred loss and defense and cost containment, or DCC, expense reserves, which is captured in the other liability/claims-made statutory line of business," said Chris Graham, senior industry research analyst, AM Best.

AM Best plans to reassess pricing and loss reserve trends in the D&O sector once calendar-year 2024 data is finalized.

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