Rating Agency Sees Slowing of Price Increases in US D&O Market

A 3-year trend of steep premium increases in the US directors and officers (D&O) insurance market along with lower limits, higher retentions, and more coverage exclusions is beginning to subside, according to Fitch Ratings.

Those trends have led to improvement in US D&O insurers' financial performance over the 3-year period, Fitch said. The slowing of those trends is leading to a reduction in both rate momentum and premium volume this year, according to the rating agency.

The price increases in the US D&O market over the past 3 years have been some of the steepest among all commercial insurance lines, Fitch said.

"Expansion of underwriting capacity from recent entrants and potential claims volatility from multiple sources reduce the likelihood that current underwriting gains will last," a Fitch statement said.

The US D&O segment's performance continued to improve in the first half of this year, with the direct loss ratio falling to 53.4 percent from 54.7 percent for the full-year 2021, the rating agency said. The segment's first-half combined ratio was estimated in the mid to high 90 percent range. Earned premium growth of 22 percent compared with the first half of 2021 and insurers' relatively stable loss experience contributed to the improvement, Fitch said.

After seeing direct written premiums increase 130 percent from 2018 to 2021, premium growth in the US D&O market has begun to reverse in 2022, with premium volume declining 2.7 percent year to year during this year's first half, Fitch said. A flat to negative premium volume trend is expected to persist in the near term, according to the rating agency.

Fitch noted that D&O insurers' longer-term profitability relies on pricing levels keeping pace with loss trends that are likely to be less predictable and could be driven higher by inflation and lower economic growth.