U.S. D&O Insurance Profitable Despite Falling Premiums

Despite a decline in premiums, the U.S. directors and officers (D&O) liability insurance segment continues to yield favorable underwriting results, though potential challenges loom due to accelerating price deterioration and risks that could spike claims activity, according to Fitch Ratings.

D&O direct written premiums fell 8% to $4.91 billion as of June 30, 2024, compared with $5.35 billion a year earlier, according to a review of property & casualty industry aggregate results.

The drop in direct earned premiums was even steeper at 16% over the same period, according to Fitch.

Despite the falloff in premiums, D&O insurers are still generating favorable underwriting profits. The segment’s direct loss ratio only rose slightly to 51.2% for the first half of 2024, compared to 50.7% for the full year 2023. This loss ratio corresponds to an estimated mid-to-high 90% direct combined ratio, indicating the business remains solidly profitable for now, the rating agency stated.

The decline in D&O premiums reflects a shift to a softening market after a period of hardening conditions. Pricing declined starting in the second half of 2022 following robust price hikes from 2019-2021. The pace of price cutting is picking up steam, according to Fitch.

Aon’s quarterly D&O market index for primary policies renewing with the same limit and deductible showed price declines accelerated to 6.5% in the second quarter of 2024 from 5.5% in the first quarter. However, the second-quarter rate decrease was narrower than the 11% decline in D&O rates in the second quarter of 2023, the report noted.

Price deterioration in the D&O insurance market will inevitably have an adverse impact on insurer financial performance, despite current favorable statutory underwriting results. While D&O underwriters are still benefiting from prior substantial price increases and changes in underwriting practices from 2019-2021, the expansion of underwriting capacity and price competition is unlikely to abate in the near term, Fitch noted.

“Recognizing when D&O pricing declines below levels consistent with an adequate return on capital is a difficult task,” Fitch noted. “Clarity on pricing deficiencies typically emerges amid a period of rising claims activity, triggered by events that may include a sharp stock market decline, an economic recession that leads to rising corporate insolvencies, or sharp increases in merger and acquisition activity.”

Another factor mitigating pricing increases for D&O insurers is that federal securities class-action litigation filings, a primary source of D&O claims losses, remained approximately 45% lower in 2023 compared to pre-pandemic levels in 2019, according to research from NERA Economic Consulting. NERA also projects that securities class action filings will fall slightly in 2024 compared to 2023. The decline in securities class-action filings is due to a sharp drop in the number of merger objection-related claims, the report stated.

“Risks that can lead to D&O claims are prevalent in many other areas that bear watching, including: regulatory and compliance issues, employment practices, cyber threats, climate risk, and cryptocurrencies,” Fitch cautioned.

View the full report here. &