The D&O Market in 2021 and Beyond: Milliman Actuaries Point to Rising Premiums and Improving Results

Of note: Not only is the D&O market growing, but the loss experience is improving. 
By: , , and | August 26, 2022

The directors and officers insurance market has experienced rapid premium growth in recent years. We analyzed annual statement data for the NAIC D&O Market, and our results indicate the direct written premium (DWP) surged to approximately $14.9 billion in 2021. This was an increase of about 40% from $10.8 billion in 2020 and the third consecutive year of large premium growth.

The NAIC D&O market year-over-year growth rates in 2020 and 2019 were 40% and 20%, respectively. This is in contrast to the prior four years (2015-2018), which displayed almost no premium growth.

Additionally, our analysis of Lloyd’s of London worldwide data through year-end 2021 indicates the ultimate signed premium for the Lloyd’s D&O market will grow to $1.9 billion in underwriting year 2021, up 46% from the $1.3 billion estimated for underwriting year 2020. The corresponding Lloyd’s D&O market year-over-year growth rates in underwriting years 2020 and 2019 are estimated to be 40% and 50%, respectively.

Not only is the D&O market growing, but the loss experience is improving.

This improvement is a welcomed outcome after the preceding years of deteriorating insurance results. Specifically, the NAIC D&O market’s reported calendar year incurred loss, and defense and cost containment expense ratios on D&O policies increased from an average of 62% for calendar years 2012 through 2016 to an average of 75% for calendar years 2017 through 2020, with the calendar year 2021 loss ratio at 64%.

Further, we projected the following ultimate loss ratio estimates for the Lloyd’s market:

  • The D&O financial institutions loss ratios increased from a low of 19% in underwriting year 2013 to a high of 101% in underwriting year 2016; the ratios declined in subsequent years, with a projected 67% ultimate loss ratio in 2021.
  • The D&O non-financial institutions loss ratios increased from a low of 72% in underwriting year 2013 to over 100% for underwriting years 2014 through 2018 with a high of 221% in underwriting year 2015; the loss ratios declined in subsequent years, with a projected 80% ultimate loss ratio in 2021.

We note that the Lloyd’s results are highly uncertain due to the immaturity of the underwriting years as of year-end 2021.

The decreasing D&O loss ratios for both the NAIC annual statement data and the Lloyd’s data are attributable to increased rate levels, decreased frequency (e.g., fewer class action lawsuits), and constrained capacity (e.g., increased deductibles, lower limits, etc.).

Depending on the class of business and layers of coverage, D&O policies in 2020 and 2021 saw rate increases of 5%-25%, or more.

According to Cornerstone Research, class-action lawsuits were down in calendar year 2021 from a high in calendar years 2017 through 2019.  Class-action lawsuits were lower in calendar year 2020 by 22% compared to 2019 and in calendar year 2021 by 35% (compared to 2020).  Consequently, D&O loss ratios are impacted by the favorable lawsuit climate.

All things considered, the results of our analysis suggest an improved D&O market in 2021. However, the results include a significant amount of uncertainty when considering both the adequacy of prior accident year reserves as well as the severity of the claims reported in 2020 and 2021, as it will take many years for these claims to settle.

The following sections detail the results of our analysis.

D&O Market Growth

As illustrated in Chart 1 below, the NAIC D&O market has experienced significant growth in DWP since 2018:


Chart 1


The DWP displayed in Chart 1 is composed of D&O premium stemming from D&O policies as reported in the D&O supplement of the NAIC annual statements. The percentages in the graph represent year-over- year changes in premium volume.

As illustrated in Charts 2 and 3 below, the Lloyd’s D&O market has also experienced significant growth in premium in recent years:


Chart 2


Chart 3

D&O Market Insurance Results

As illustrated in Chart 4, the NAIC D&O market insurance results deteriorated between calendar years 2017 and 2020 as compared to historical levels, but improved in 2021:


Chart 4


The above information is based on data reported in the annual statement supplements for the NAIC D&O market on a calendar year basis.

Due to the settlement lag associated with D&O policies, it is also informative to review report year loss ratios. The industry estimates of report year loss ratios change over time as additional information becomes known about the claims. Report year loss information for D&O policies is not readily available.

However, as a proxy for development, one can review the results as reported in the NAIC annual statement, Schedule P, other liability claims made, as most D&O exposure would be recorded in this segment.

We note that other liability claims made will also contain other policies besides D&O. Therefore, we summarized the results of the other liability claims made published information for 18 companies in which their D&O premium was at least 50% of their other liability claims made premium based on their D&O supplement and Schedule P.

The following table displays how the published ultimate loss ratios for each report year have changed over time.

We note a consistent increase in the ultimate loss ratios in the last calendar year for report years 2016 through 2019. If this trend continues, many companies will report adverse prior year development in calendar year 2022.


Chart 5


We note that report years 2017 through 2019 had a higher frequency of class-action lawsuits (as illustrated in Chart 8 below).

Since it takes a few years for class-action lawsuits to be settled, it is not unexpected that years with a higher frequency of claims have more [development], even on an ultimate basis.

Chart 6 illustrates how the current estimate of the ultimate loss ratios differs from initial loss ratios.

Chart 6

As illustrated in Chart 7, the Lloyd’s D&O market has also recently experienced a period of deteriorating insurance results with improving trends. The values represent our projected estimates based on our analysis of available information for the worldwide D&O exposure.


Chart 7


The Lloyd’s D&O financial institutions results were adverse in underwriting year 2016 and 2017 with gradual improvements starting in underwriting year 2018.  The Lloyd’s D&O excluding financial institutions loss ratios are projected to be greater than 140% for underwriting year 2014 through 2017 with gradual improvements starting in underwriting year 2018.

Please note that the results for underwriting years 2020 and 2021 are particularly uncertain given the years are still in the earning period and the losses develop slowly. Almost 90% of the losses are still unreserved as of 24 months.

We also note that the Lloyd’s premium base is not directly comparable to the NAIC premium base. The Lloyd’s premium is reported net of commissions and brokerage while the NAIC premium is typically reported gross of commissions and brokerage.

Therefore, without adjustment, the Lloyd’s loss ratios would be higher than the loss ratios reported in NAIC annual statements due to the difference in how premium is reported.

Decline in Frequency of Class-Action Lawsuits

Per the Cornerstone analysis, class-action lawsuits were lower in calendar year 2020 by 22% compared to 2019 and in calendar year 2021 by 35% (compared to 2020).

The decreases were primarily due to lower levels of class-action lawsuits related to M&A activity. However, other federal and state class-action lawsuits have also decreased.

The lower overall activity in calendar years 2020 and 2021 may be attributed to the COVID-19 pandemic.


Chart 8


Despite the number of class-action lawsuits being lower in 2020 and 2021, calendar year 2020 and 2021 each incurred 17 class-action claims involving COVID-19.

Note that, COVID-19-related class-action lawsuits did not exist prior to 2020.

There has also been an increase in class-action lawsuits related to Special Purposes Acquisition Companies (SPAC).  In 2020, there were 5 class-action filings related to SPACs, whereas in 2021 there were 32 filings.

This increase corresponds to an increase in the formation of SPACs. A discussion of the emergence of SPAC policies and potential impact can be found in an upcoming article soon to be published.

Therefore, although overall class-action lawsuits have decreased in 2020 and 2021, there has been an increase in certain types of lawsuits.

Concluding Remarks

While the D&O market has significantly improved in 2021, the future is uncertain.

There were large rate increases seen in 2020 and 2021, but the rates increases in 2022 have dropped to flat or single digits. Some insurance companies will continue to see increases to prior coverage year reserves, which will create a drag on earnings. The instability caused by the Russian invasion of Ukraine, the current high inflation levels and the decline in the stock market in 2022 all make it difficult to determine how loss activity will change in 2022.

However, security class-action filings through June 2022 seem to be on pace with the filings in 2021.

Finally, an increase in new types of exposure from SPAC policies (a subset of D&O policies) may impact future D&O results. &

All NAIC data referenced in this article was provided by S&P Global Market Intelligence, unless otherwise noted. All Lloyd’s data referenced in this article was provided by Xchanging, unless otherwise noted. All class-action filing references in this article were provided by Cornerstone Research – Economic and Financial Consulting and Expert Testimony – Securities Class Action Filings 2021 Year in Review. For further information, please reach out to the authors.

More from Risk & Insurance