The insurance market underwriting cycle is turning unfavorablein many United States commercial market segments, includingdirectors and officers (D&O) liability insurance, New YorkCity-based Fitch Ratings says.

Premium rates in property lines have been declining for sometime in response to a lack of large loss events. Fitch said itexpects that competitive forces will likely drive prices lower inmore casualty and liability lines, in part because of pastunderwriting success.

Quarterly D&O Pricing Index report

The latest Quarterly D&O Pricing Index report compiled byAon Risk Solutions indicates that pricing on D&O programs thatrenewed in the third quarters of both 2015 and 2014 is 10.1% lowerthan pricing on the comparable group a year ago. Willis's recentMarketplace Realities 2016 report indicates that public company andfinancial institution company D&O renewal rates are projectedto be flat to slightly down in 2016. Excess rates are projected tofall by 5% to 15% next year. However, weaker-performing privatelyheld and nonprofit businesses are still seeing rate increases.

D&O underwriters have benefited from relatively stableclaims trends have in recent years, particularly regarding claimsrelating to securities class action filings. Underwritingperformance slightly deteriorated in 2015 with a reported statutorydirect loss ratio of 51% for the industry at Sept. 30, comparedwith 49% in full year 2014. Considerable further weakening inunderwriting performance would need to be experienced for a shifttoward positive D&O premium rate movement, Fitch said.

Recent merger activity in the property/casualty industry willhave a meaningful effect on D&O market composition, but isunlikely to influence near-term pricing momentum. New YorkCity-based multinational insurance giant American InternationalGroup's perennial market leader position will narrow asZurich-based Ace Ltd.’s $28.3 billion acquisition of Warren,N.J.-based Chubb closes.

Still competitive D&O market

The recently completed $7.5 billion acquisition of Houston-basedHCC Insurance Holdings by Tokyo-based Tokio Marine and Dublin-basedXL Group’s $4.2 billion acquisition of Bermuda-based Catlin arealso promoting a more concentrated, but still competitive, D&Omarketplace with ample underwriting capacity, Fitch said.

Based on nine months 2015 direct premiums, 50% of the market iswritten within four companies, with pro forma D&O market sharesplit approximately:

• 17% — AIG.
• 14% — Ace/Chubb.
• 10% — XL Catlin.
• 9% — Tokio Marine U.S.

Newly merged entities' success in integrating and retainingbusiness within a larger portfolio will influence marketcompetition going forward. Smaller underwriters may become moreactive in seeking growth by attracting displaced accounts orunderwriters from recent transactions, Fitch said.