Concerns Rise Over Sufficient D&O Insurance Rates Amid Falling Premiums

The directors’ and officers’ (D&O) insurance market is currently navigating a complex phase. After enduring a decade of low, unprofitable rates, the market saw a significant recovery through aggressive pricing increases during 2020 and 2021. These changes stabilized the market and attracted fresh capital, enhancing underwriting creativity and capacity. However, this positive trend reversed in the second quarter of 2022, with premiums and retentions decreasing sharply, primarily influenced by a slowing economic environment marked by fewer mergers and acquisitions (M&A) and initial public offerings (IPOs).

Despite a brief stabilization in 2023 with flat renewal rates, the industry is facing a potential crisis as premium reductions outpace economic inflation, raising concerns over future adequacy in coverage. The sector’s direct calendar year loss ratio has improved, indicating some underwriting success, yet the overall profitability remains uncertain as the effects of past underpricing and increasing litigation costs loom.

AM Best has assigned a negative outlook to the D&O market for 2024, reflecting concerns over increased litigation risks, the complexity of the business environment, and growing exposure to cyber and data breaches. Additionally, the economic pressures from high inflation and interest rates are straining companies, potentially leading to more shareholder and derivative actions. As litigation funding becomes more prevalent, it is pushing up claims costs significantly, affecting the sustainability of current pricing strategies.

The future of the D&O market hinges on the industry’s ability to adapt to these evolving challenges by accurately assessing and pricing risks, and maintaining sufficient capital to cover potential claims in an increasingly litigious environment.