Despite Record Premiums, US D&O Insurers Post Underwriting Losses

A 67 percent cumulative increase in market premiums over the past 2 years hasn't been enough to prevent underwriting losses for US directors and officers (D&O) liability insurers, according to Fitch Ratings.

Those underwriting losses are expected to continue over the near term, Fitch said. "The market has been disrupted by a confluence of challenging economic, regulatory, legal, investment, and social factors since the pandemic's onset, leading to a worsening claims environment," the rating agency said.

The risk to ratings of individual insurers from weaker D&O segment results is limited, however, as leading insurers are larger, diversified entities, Fitch said.

D&O direct written premium volume increased to $10.7 billion in 2020, Fitch said. But, even though after several years of flat to declining revenue growth premiums increased by 40 percent in 2020 and 20 percent in 2019, insurers' underwriting performance measures failed to demonstrate similar improvement, according to the rating agency.

The US D&O industry's direct incurred loss and defense and cost-containment (DCC) ratio declined modestly to 74 percent in 2020, Fitch said, but the deterioration in the industry's results for the last 4 years is reflected by a loss and DCC ratio that averaged 75 percent from 2017 to 2020, versus a 61 percent average from 2011 to 2016.

The COVID-19 pandemic represents a new sources of potential claims losses for insurers across a variety of segments, particularly D&O, according to Fitch. Pandemic-related D&O claims losses will likely take several years to fully measure and resolve.

"In recent years, D&O claims have also emerged in areas including cyber events and employment practices matters where alleged negligence or poor governance practices affected corporate reputations or generated material financial losses," Fitch said. "These can lead to more allegations of a lack of management oversight of information system security and lax risk management. Class action filings related to cryptocurrencies are also a recent phenomenon."