AM Best expects that although renewal premium and pricing declines will continue in 2025, they are likely to moderate in light of the expanding exposures that could become more impactful for D&O insurers. (Credit: lucadp/Adobe Stock)
Renewal pricing trends for directors’ and officers’ (D&O) liability insurance remained favorable for public and private companies into the first quarter of 2025. Aggregated market renewal premiums continue to fall for certain types of accounts, particularly companies involved in initial public offerings (IPOs), special purpose acquisition companies (SPACs), and de-SPAC companies since there has been less activity involving those types of transactions during the past couple of years.
However, for many public companies, the significant renewal price decreases will likely begin to moderate, which AM Best believes could benefit the market, given the potential headwinds D&O insurers will face. Accident-year results over the near term may indicate that premiums during the past couple of years fell too far, too quickly.
Tighter risk selection, more stringent underwriting practices and a more judicious offering of limits on a per-account basis helped improve underwriting performance, as reflected in lower direct loss ratios the past few years, even as premium levels fell. D&O underwriters are still benefiting from the significant rate and price increases, and the more conservative underwriting practices, that shifted the market’s dynamics in 2019-2021.
One potential headwind, however, is that adverse development may be embedded in prior accident-year incurred loss and defense and cost containment (DCC) expense reserves captured in the other liability (claims-made) statutory line of business. For the first eight months of 2024, settlements skyrocketed to $2.7 billion, matching the record-breaking pace set in 2023. Although final numbers for full-year 2024 have not been fully aggregated yet, the expectation is that larger dollar settlements are not going to abate and are instead expected to continue at least through the near term. The average settlement for public companies in 2023 was $37 million, a substantial increase over the $29.6 million 10-year average. Similarly, the median settlement increased to around $13 million, compared with the 10-year average of $9.5 million. This trend is not expected to reverse anytime soon.
Similar trends can be seen with securities class action settlements, and a greater frequency of lawsuits against U.S.-domiciled companies portends negative implications for future calendar-year profitability. Current filings show that the plaintiffs’ bar is shifting its focus from companies with a market capitalization of $2 billion or higher to those under $2 billion, creating new opportunities for litigation-hungry plaintiffs that could lead to indemnity and expense payments rising for insurers from D&O liability claims.
The softer pricing of the past couple of years could ultimately dampen the financial performance of D&O insurers because the premium base to support future claims activity has diminished, even as risks are emerging and expanding. Through Sept. 30, 2024, direct monoline D&O premium had declined for the past 10 quarters compared with the same prior-year quarter.
In recent years, underwriters have largely steered clear of providing the high limits per individual risk that were more commonplace during the 2010s and that factored heavily into the adverse loss-severity trends of the past decade. Insurers have also refined their risk appetites, focusing on risk classes they believe can be adequately priced in the current market. In these ways, insurers in the current D&O market are employing improved enterprise risk management (ERM) strategies to their D&O liability portfolios, underwriting in a more-informed fashion even though average premiums have continued falling.
At the same time, the emergence of generative artificial intelligence (AI) is potentially exposing corporate officers to new risk exposures as companies leverage AI in different strategic ways concerning the creation of financial records, operational reports, record keeping and in the analysis of company data. As a result of these changing functions, companies could find themselves exposed not only by their direct use of AI but also to potential AI-related risks embedded in the software the company uses. Additionally, there are risks related to greater regulatory scrutiny, as governments begin to create regulatory frameworks, and to manage the bias and misinformation that can be spread by the misuse of AI, as well as issues related to managing unrealistic investor expectations about the capabilities of the technology.
Per- and polyfluoroalkyl substances (PFAs) are man-made chemicals associated with cancer, birth defects, developmental damage to infants and impaired functioning of the liver, kidneys and immune systems. Cases may arise where plaintiffs allege that company officers and directors knew about the PFAS contamination and failed to act. At worst, these cases have the potential to rise to the same level as asbestos and could have far-reaching detrimental effects on the D&O market.
The shifting geopolitical landscape and conversation around policy changes with respect to DEI (diversity, equity and inclusion) and ESG (environmental, social and governance), particularly relative to legislative and regulatory changes and specific to related corporate practices, could also expand the potential that companies face more costly and drawn-out claims stemming from financial and reputational disruptions.
AM Best expects that although renewal premium and pricing declines will continue in 2025, they are likely to moderate in light of the expanding exposures that could become more impactful for D&O insurers. Additionally, self-insured retentions are expected to increase for risks classes facing more challenging claim environments. Headwinds such as rising settlement and litigation costs and growing exposures from new technologies counter some of the positives that have led to more favorable direct underwriting results of late and contribute to AM Best’s current negative outlook for D&O liability.
David Blades (david.blades@ambest.com) is associate director of Industry Research at AM Best. This article is adapted from AM Best's "US Directors and Officers Liability Insurance Market Segment Report." It it published here with permission from AM Best and may not be reproduced.
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