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.
