Best’s Market Segment Report: COVID-19 Pandemic May Accelerate Much-Needed Changes in Struggling D&O Market

Business Wire

OLDWICK, N.J.--(BUSINESS WIRE)-- AM Best expects the U.S. directors and officers (D&O) insurance segment to undergo radical changes based on current financial results and the unprecedented turbulence created by the COVID-19 pandemic.

In its Best’s Market Segment Report, “Accelerating Trends, Unprecedented Turmoil Could Lead to Seismic Change for D&O Industry,” AM Best states that the level of uncertainty in the D&O market created by the pandemic is amplified by the considerable level of strain the market already faced coming into 2020. The last few years have challenged underwriters of D&O liability coverage with an increasing number of lawsuits and larger jury awards and settlements. Aggregate defense and cost containment expenses for the industry rose to $973 million in 2019 from $727 million in 2018; this exceeded the 2017 total of $946 million, which at the time represented an unprecedented spike.

D&O prices increased by 44% in the United States in first-quarter 2020, according to published reports, and AM Best expects triple-digit rate increases in a post-COVID-19 world. Emerging claims and COVID-19-related litigation, as well as a longer tail for claims from protracted litigation, is anticipated as well. The pandemic could introduce more complexity owing to an increase in frequency and severity of claims from the directly affected industries, such as travel and leisure. Inadequate disclosures, specifically concerning D&O oversight and management of the pandemic, are likely sources of future D&O claims.

“Standard D&O wording may not apply to specific risks associated with COVID-19, but will apply to traditional D&O perils, including those triggered by COVID-19 events,” said Sridhar Manyem, director of industry research and analytics. “Such ‘silent COVID-19’ coverage may not expressly address pandemic perils, but may still respond to them.”

According to the report, extreme volatility in financial market conditions also could lead to claims concerning other alleged problems. The United States has become more litigious over the past few decades, to the point that there likely will be an increase in securities class actions, shareholder derivative litigation and other claims against directors and officers in troubled economic times.

AM Best expects the momentum for price increases to continue into 2021. Beyond pricing initiatives, D&O insurers had been addressing deteriorating results through a multitude of underwriting actions, such as more disciplined risk selection, risk retention and terms and conditions, as well as wider use of reinsurance. D&O insurers with a well-defined risk appetite, when combined with refined risk selection and pricing strategies, will generally have the greatest chance to succeed in the current market. At the same time, the additional uncertainties associated with COVID-19 will stress the effectiveness of even the most capable insurers.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=297988.

For a video discussion about the report with Manyem and David Blades, associate director, industry research and analytics, AM Best, please go to http://www.ambest.com/v.asp?v=dando620.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.