Favorable loss ratios and an unprecedented decline in initial public offering (IPO) activity led to the softening of the directors & officers market, but signs point to impending changes.
While many segments of the insurance industry are wallowing in the hard market, directors & officers is an anomaly. After a wave of sharp premium increases, the segment saw an increase in competition and a reduction in rates in 2022, which has continued into 2023.
Through the first half of 2023, D&O continued to generate favorable loss ratios despite heightened pricing pressure and material declines in premium volumes, tied in part to increased competition and leading to a soft market, according to the latest report by Fitch Ratings.
A confluence of factors has impacted the softening of the D&O market to date.
“From 2020 to 2022 there was a sharp decrease in state and federal Securities Class Action (SCA) lawsuits, a key contributor to D&O claims losses, with an average of approximately 250 per year, down from historic highs between 2017 and 2019 when they averaged approximately 420 per year," says Paul Manguson, public D&O product manager, Travelers.
“Additionally, a notable factor leading to softening rates in public D&O is an increase in capacity," he says. “This change is made up of a combination of the additional capacity being offered by new entrants and an increasing willingness of legacy carriers to offer higher limits."
Further, an unprecedented decline in initial public offering (IPO) activity also played a role in the softening of rates. “During the hard market, IPOs experienced some of the highest rate increases in public D&O, which corresponded with an unprecedented high number of IPOs in 2020 and 2021," says Jim Rizzo, product leader, U.S. D&O, executive risk, Beazley.
“The number of IPOs fell drastically since peaking at 1,035 in 2021," Rizzo continues. “However, there are a notable number of both new entrants and legacy carriers seeking new IPO business. This dynamic is one of the key contributing factors that has led to softening in D&O rates for IPOs."
The D&O market continues to remain soft, primarily “due to increased competition from new insurance carriers that recently entered the D&O space during the hard market," says Ziad Kubursi, head of financial and executive liability, The Hartford. “This is putting downward pressure on price, despite the increase in frequency and severity that is driven by inflation, loss costs and increased regulatory scrutiny and an active plaintiff's bar."
Yet, “carriers are aware that the premium pool is moving into that insufficient stage again," Rizzo says. “Discipline is coming back amongst the underwriting community, and I think we're going to see a waning of those decreases."
Further, the volume of SCA filings “is starting to normalize, with 2023 on track to see a 15% increase in frequency over 2022 if it continues at the same rate as the first half of 2023," Rizzo explains.
The D&O market is dynamic and ever evolving, and independent agents involved in this segment should consider how they can continue to make sure customers have the insurance protection they need.
“Having established carriers with broad product offerings provides clients with multiple touch points and solidifies the strength of the relationship with the carrier," Kubursi says. “Legacy carriers with track records of experience, financial strength, product depth and scale that have successfully managed cycles have the stability and technical know-how to provide solutions catered to the industry environment and customized to the individual risk."
As the D&O market changes and “if the rates continue to trend toward being inadequate, we expect to see further restriction of capital as underwriters express more prudence," Rizzo says. “Agents are going to have to navigate sourcing capacity for their clients with this level of resistance."
“We're also seeing a retreat in the wholesale channels with a lot of retailers pulling those wholesale placements back—because, with the premium levels reduced, they're getting reduced commissions which they don't want to share," Rizzo explains. “I think that hurts a lot of the independent agents that rely on wholesaler's expertise and their reach in the marketplace."
While complex conditions continue in the D&O market, to be most effective it will be “beneficial to keep clients informed through frequent communication and education," Manguson says.
Today, despite mounting concerns of economic instability and a looming recession, the D&O market has emerged as more client-centric and competitive, according to a recent article by Patrick Whalen, underwriter, executive risk, Beazley. As rates dip, companies previously underinsured and constrained by pricing are encountering fresh opportunities, while, at the same time, positive strides in the equity markets also paint an encouraging picture. In all, prevailing data suggests an impending stabilization, boding well for all stakeholders, the article states.
Olivia Overman is IA content editor.