D&O Insurers Warned on Competitive Pricing, Troubling Claims Trends

February 26, 2018

Fitch analysts say the trend of slowly declining D&O premium rates is likely to continue in 2018. Market capacity appears relatively unchanged this year while competition for business remains intense.

Willis Towers Watson’s Marketplace Realities 2018 report predicts that D&O pricing overall is likely to see flat to 7 percent lower rate changes in 2018. Public company excess layer rates could drop 5-15 percent. Private and not-for-profit organizations, which had less favorable overall underwriting experience in recent years, could be an exception in the D&O segment and experience moderate 2018 price increases.

According to Fitch, poorer overall U.S. property/casualty industry results and large catastrophe-related losses in property lines are likely to lead to pricing increases for several individual market segments this year. But D&O market pricing is likely less affected by these broader market circumstances.

From a D&O claims perspective, Fitch warns about the growth in securities class action lawsuits. Cornerstone Research’s 2017 year in review of securities class action filings reported 412 federal securities class action filings for the year, a 52 percent increase. Traditional filings related to allegations including misrepresentations in financial documents or making false forward looking statements increased for the seventh consecutive year. Notably, merger objection related claim filing more than doubled in 2017, reaching a record high.

The number of outstanding federal class actions still pending from all filing years is at a ten-year high, according to NERA Economic Consulting. While settlement values of suits have moderated in the last few years, the potential for future larger cost settlements remain. A hint of higher general inflation amidst stronger economic growth could also contribute to a rise in defense costs and settlement values of longer duration liability claims going forward.

According to Fitch, another concern is that public company executives’ liability exposure continues to evolve. Courts are more inclined to hold executives individually accountable for corporate crimes following the 2015 Yates memorandum from the Department of Justice adds to this personal exposure.

Fitch also sees an additional source of D&O risk from cyberattacks, which can lead to allegations of a lack of management oversight of information system security and lax risk management.

Finally, Fitch warns, insurers must be alert to the recent phenomenon of class action filings related to cryptocurrencies.

Despite its warning, Fitch does not believe D&O carriers’ ratings are in jeopardy. Fitch analysts note that D&O underwriters are typically larger, multi-line insurers that can offset potential large losses with results from other segments. Also merger and acquisition activity could influence market competition and mitigate pricing risks.

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