Underwriters in the Directors & Officers (D&O) insurance sector in 2024 continue to benefit from significant price hikes and refined market practices adopted between 2019 and 2021. These adjustments drove profitability back to healthy levels, according to Fitch Ratings report. Beinsure analyzed the report and highlighted the key points.
However, the market’s improved performance has spurred increased underwriting capacity and intensified price competition, a trend unlikely to reverse soon.
D&O pricing now trends contrary to most U.S. commercial lines, which still experience positive price movement, although at more moderate levels compared to prior years.
A wave of sharp premium rate increases and improvements in US market underwriting practices from 2019 to 2021 led to a significant recovery in segment performance.
Allianz Research expects global growth to slip into negative territory in Q4 of 2024 (-0.1% q/q), followed by a slow recovery at +1.5% in 2024.
Eurozone growth is likely to plunge to -0.8% in 2024 due to soaring energy prices and negative confidence effects creating a shock on real disposable incomes and corporate margins. The US will register a -0.7% fall in GDP, mainly due to rapidly tightening monetary and financial conditions, which will significantly cool the housing market.
U.S. D&O liability insurance underwriting results
U.S. D&O liability insurance segment continues to generate favorable statutory underwriting results, despite an ongoing decline in written and earned premium volume in a softening market pricing environment.
A review of property & casualty industry aggregate results indicate D&O direct written premiums fell by 8% year over year as of June 30, 2024, and direct earned premiums doubled that pace, declining by 16%.
This change follows a 15% and 12% decline in segment written and earned premiums, respectively, for 2023.
D&O segment direct loss ratio rose only slightly to 51.2% for 1H 2024 compared with 50.7% for full year 2023. This figure corresponds with an estimated mid-to-high 90% range direct combined ratio.
According to D&O Insurance Insights, recognition of insurers’ reserve redundancies from the most recent accident years may support near-term underwriting results.
Year-to date D&O direct written premiums fell by 11% yoy, and direct earned premiums declined by 9%, based on property/casualty industry aggregate statutory results.
Loss ratios are expected to worsen, as heightened competition has reversed resulting in lower renewal rates. However, the segment direct loss ratio of 53.6% for 1H 2023 was relatively unchanged from 53.4% for mid-year 2022 (see Top 5 Risk Trends D&O Insurance Market).
P&C Insurance Industry D&O Underwriting Results
According to Aon’s quarterly D&O market index, primary policies renewing with the same limits and deductibles started seeing negative premium rate changes in the second half of 2022.
This followed the strong hard market conditions of 2019-2021. By 2Q 2024, pricing declines had accelerated to 6.5%, up from 5.5% in 1Q24. Further price erosion will likely strain D&O performance.
D&O Insurance Quarterly Pricing Index
Federal securities class-action litigation, a major source of D&O claims, was approximately 45% lower in 2023 than in 2019, driven largely by a significant drop in merger objection claims, as noted by NERA Economic Consulting. NERA expects class action filings in 2024 to slightly trail 2023 figures.
Identifying when D&O pricing dips below levels that ensure adequate returns on capital remains challenging.
Pricing issues often become evident during periods of increased claims activity, which may result from events like steep stock market declines, economic recessions causing higher corporate insolvencies, or surges in M&A activity.
Other risks that could trigger D&O claims include regulatory and compliance challenges, employment practices, cyber threats, climate risks, and cryptocurrency-related exposures.
FAQ
D&O underwriters benefitted from substantial price hikes and refined market practices. These adjustments significantly improved profitability in the sector.
Enhanced performance has led to increased underwriting capacity and intensified price competition. This trend is expected to persist, putting pressure on pricing.
Unlike most U.S. commercial lines that continue to see moderate positive price movement, D&O pricing is experiencing declines. This is a reversal from the hard market conditions of 2019-2021.
Allianz Research predicts global economic growth will slip into negative territory (-0.1% q/q) in 2024, with the Eurozone facing a significant decline of -0.8% due to energy price shocks and falling disposable incomes. The U.S. GDP is also expected to drop by -0.7%, influenced by tight monetary and financial conditions.
Despite a softening market, the U.S. D&O insurance segment continues to deliver strong underwriting results. Direct written premiums fell by 8% year-over-year as of June 30, 2024, while direct earned premiums declined by 16%.
Although competition has lowered renewal rates, the segment’s direct loss ratio for 2024 only rose slightly to 51.2% from 50.7% in 2023. Insurers’ reserve redundancies from recent accident years may support short-term results, but continued price competition could worsen loss ratios.
D&O claims could be spurred by several risks, including economic downturns, stock market declines, corporate insolvencies, and heightened M&A activity. Other concerns include regulatory and compliance issues, employment practices, cyber threats, climate risks, and cryptocurrency-related challenges.
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AUTHORS: James Auden – Managing Director at Fitch Ratings, Christopher Grimes – Director at Fitch Ratings, Laura Kaster, CFA – Senior Director of North and South American Financial Institutions, Fitch Ratings
