Changing Market Dynamics Raise Questions for US D&O Insurers

The US directors and officers (D&O) market is seeing changing dynamics that raise the question of whether D&O insurers can sustain their recent more favorable results given less aggressive pricing in the face of high social inflation and inflationary economic pressures, according to A.M. Best.

In a Best's Market Segment Report, titled "Hard Market Gives Way to Changing Dynamics for D&O Insurers," the rating agency said that US D&O insurers' bottom lines benefited from double-digit price increases in 2020 and 2021. Now, however, rate and price softening has become the norm, leading to declining premiums because of improving loss trends, Best said.

At the same time, competition in the D&O market has increased, with established market players forced to defend their positions against new entrants.

D&O liability direct premium written decreased to $9.7 billion during the first 9 months of 2022 from $10.3 billion during the same period in 2021 due to a decrease in exposure, Best said. "With year-over-year D&O liability premiums dropping and resulting premiums growing at a level slightly below economic inflation, the segment could be susceptible to the continuing effects of social inflation on existing open claims," a Best statement said.

"The pandemic-driven court backlogs have lengthened the tail on liability claims for D&O insurers. The high number of cases litigated and the duration of litigation may result in elevated legal expenses, raising defense and cost containment expenses," Christopher Graham, senior industry analyst at A.M. Best, said in the statement. "If social inflation drives an increase in ultimate incurred losses, D&O insurers' bottom line would be impacted negatively."

Best noted that the number of initial public offerings (IPOs) dropped dramatically in 2022, to 110 from 968 in 2021. IPOs had fueled D&O premium growth in 2020 and 2021, and the drop in IPO activity in 2022 was a key factor behind the drop in D&O liability direct premium in 2022.

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