A Good Year May Not Be a Good Thing in D&O Liability Market, Says AM Best

The U.S. directors and officer segment in 2023 recorded a direct
loss ratio of 50.8—the best result in nearly a decade—but industry
rating agency AM Best is not convinced the good times will
last.

In a special report on U.S. D&O
liability, AM Best said the market is "unlikely to hit bottom
in 2024." Due to recent favorable results, insurers will not be
pressured to increase rates.

More insurers have entered the market recently, increasing
capacity and driving down price, which in led AM Best in March to
tag the D&O market with a negative
outlook.

The rating agency appears concerned with several lions in the
grass—mainly lawsuits from prior years that continue to matriculate
through the courts amid the current trend of social inflation that
has, in some cases, significantly increased jury awards and
settlements. AM Best said adverse loss reserve development on
claims that remain open from accident years 2017-2020 "could cause
an erosion in current calendar-year profitability."

Demand remains fairly low, pushing down rates after the market
looked to correct more a decade of soft market conditions resulting
in underpriced risk with price increases from 2020-2022. Initial
public offerings have fallen following economic uncertainly as the
country emerged from the pandemic. As a result, securities class
action lawsuits also declined.

Direct written premiums (DPW) in 2023 were down 15% from 2022
and down 23% from 2021, AM Best reported.

However, lawsuits of the past, a more favorable environment for
IPOs, or emerging risks within environmental liabilities, cyber,
climate litigation, and environmental, social and governance (ESG)
risk may quickly increase the frequency and severity of losses.

"D&O underwriter may need to quickly amend underwriting,
pricing, claims handling, and legal strategies to maintain the
favorable performance of the past couple of years," AM Best
said.

Right now, the U.S.
D&O market remains heavily concentrated with the top 10 writers
accounting for 63% of direct premiums written. The top 20 carriers
hold 86% market share. DPW for XL America was down 40% in 2023 but
it remains the largest D&O insurer.