While the U.S. directors and officers (D&O) insurance market saw a 40% increase in direct premiums written in 2020, the segment also experienced a 32% rise in direct losses incurred, according to a new AM Best report.

The new Best’s Market Segment Report, titled, “D&O: A Very Cautious Seller’s Market,” notes how carriers in this market still are struggling with substantial losses stemming from years of relatively soft premiums. Other causes for the market’s adverse performance include:

• Adverse litigation and settlement trends, including higher jury awards;
• The rise in securities class action suits, which doubled between 2015 and 2017 before reaching a high of 427 in 2019;
• A wide range of emerging risks, including environmental, social and governance concerns for boards; and
• The heightened risk of bankruptcies, which is further testing insurance companies and their ability to develop products and provide adequate coverage for a fair price.

The loss ratio deterioration in 2020, despite the increased premium volume, illustrates the extent of loss frequency and loss severity. According to the report, companies entered 2021 with fundamental underwriting conditions still in a substandard state. COVID-19-driven court closures and uncertainty about re-opening also had

a material effect on the legal environment in 2020, inhibiting or at least delaying cases from progressing through the legal system. While this provided a temporary respite for insurers, given the number of court closures, the number of unsettled cases has caused significant uncertainty for claims and the prospect of higher loss costs, as well as provides momentum for the steep increase in rates. In particular, according to the report, diversity-related shareholder derivative suits alleging either corporate inaction to address diversity issues or the failure of boards to act on diversity goals has the potential to develop into a megatrend along the lines of the #MeToo movement.

Companies have responded to the deepening deterioration in D&O profitability by raising rates every quarter. The average rate increase of 14.7% in the fourth quarter of 2020 was more than double the 7.0% average rate increase in the fourth quarter of 2019. The line’s unfavorable performance also has led to hardening market conditions, with insurers often offering renewal policyholders lower coverage limits and stricter policy terms and conditions. Despite insurers’ multipronged mitigation strategies, the need for better pricing and tighter underwriting to overcome worsening results remains acute. Consequently, AM Best views the current D&O market is a tough market for all parties involved—insurers, brokers and insureds.

To access a copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=308125.

A video discussion about this report with Sridhar Manyem, director, industry research and analytics, and David Blades, associate director, industry research and analytics, both of AM Best, please go to http://www.ambest.com/v.asp?v=ambdando421.

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 London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2021 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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