Profitability Returning to D&O Liability as Rate Hikes Take Hold: Fitch

September 25, 2019

After being down, the U.S. directors and officers (D&O) liability insurance sector is looking up. Carriers are raising rates and restoring profitability, according to Fitch Ratings, after several years of flat premium growth and less favorable claims trends in a shifting tort environment.

Statutory financial data from D&O supplemental filings reveal that the effects of rate increases may be taking hold. Fitch Ratings’ compilation of statutory data reveals direct written premium was up by 15% for the first half of 2019, although reductions in underwriting capacity and policy limits from several leading underwriters are contributing to larger rate increases.

Market reports from insurance brokers indicate double-digit rate increases in recent renewals. According to Willis Towers Watson’s latest Commercial Lines Insurance Pricing Survey, commercial lines pricing jumped by nearly 4 percent in the 2019 second quarter compared to the same period a year ago, while hovering closer to 2 percent over each of the previous five quarters. Willis Towers Watson said price increases in D&O approached double-digit jumps for the first time in several years.

The industry direct loss ratio for the segment dropped to 57% in first-half 2019 from 62% in full-year 2017 and 2018, according to Fitch.

As a result of the rate increases, “D&O premium volume has turned positive for the first time after four consecutive years of relatively flat growth,” said Jim Auden, managing director at Fitch Ratings. Direct earned premiums increased by 5% for the first half and Fitch estimates direct written premium will increase by 8%-10% in 2019.

While rate increases are expected to continue to promote improved profits, D&O underwriters remain concerned about increased claims activity, rising defense costs and legal settlements in several areas. A spike in securities class action filings in 2017 and 2018, particularly relating to merger objection claims, is continuing in 2019, according to the analysis.

In its report, “U.S. Director and Officers Liability Market Update – Midyear Results Show Rate Increases Taking Effect,” Fitch also warns that second-half results could be marred by claims risk from cyber and employment practices, from which higher risk of loss may also translate into greater demand for coverage, Fitch analysts note.

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