D&O Insurers Under Pressure But Big Enough to Handle Pandemic Claims, Says Fitch

September 28, 2020

As claims related to the economic fallout from the pandemic emerge in the U.S. directors & officers (D&O) liability insurance segment, insurers can expect the claims to take several years to pay out and underwriting losses to continue over the near term, according to Fitch Ratings.

However, there is limited risk to ratings of individual D&O insurers as a result of pandemic-related claims, Fitch said, adding that carriers with significant D&O premiums are larger, diversified entities.

Also, recent pricing changes are supportive of improving profitability post-pandemic, which will depend on the path of the economic recovery.

According to Fitch, P/C insurers with exposure to D&O underwriting are typically larger multiline insurers that can absorb or offset potential losses with results from other segments. It is usually offered as part of a suite of product offerings, representing approximately 1% of total industry direct premiums. At the end of 2019, the 10 largest D&O writers held a combined 67% share of all direct statutory premiums, and only 37 individual organizations wrote greater than $10 million of D&O direct premiums.

Years of Losses

Underwriting performance for the segment has been hurt by many years of competitive pricing and ongoing increases in multimillion-dollar jury verdicts and claims settlements, as well as rising defense-related costs. Fitch estimates the D&O has reported statutory underwriting losses for three consecutive years from 2017 through 2019, including a 106.6% direct combined ratio in 2019.

Woodruff Sawyer Explores D&O Litigation and Insureds’ Understanding

In 2019, insurance agency Woodruff Sawyer forecasted the rise of D&O premiums—the first increase in nearly 10 years—and predicted it would continue on into 2020 and beyond. Today, the broker says that that rise shows no sign of decline as securities class action lawsuits and record settlements, corporate bankruptcies, and COVID-19 continue to impact an already difficult market.

To add additional pressure, insurers are watching as over 600 unresolved securities class action court cases wind their way through the judicial system, Woodruff-Sawyer says..

Woodruff Sawyer’s survey of underwriter reveals that underwriters are concerned that their insureds are not fully aware of the high cost of litigation, with 83% of underwriters saying they believe that companies underestimate the current risk. “That doesn’t bode well for insurance renewals for the riskiest clients—recently IPO’d biotech and technology companies—whose volatile share prices often make them targets for shareholder litigation,” the agency says.

The agency shares its outlook in its D&O Looking Ahead Guide 2021.

Despite renewal rate pricing skyrocketing, results remain under pressure with the direct incurred loss ratio rising to 62% in the first half of this year, the highest midyear level in 10 years. The Council of Insurance Agents & Brokers commercial market survey indicates that D&O renewal rates moved 16.8% in 2Q20 versus a 4.3% increase in 2Q19. Rates on excess coverage layers are increasing at a higher rate.

“Direct written premiums increased by 22.5% for the first half compared to the same period last year, with “pricing momentum poised to propel revenue growth through 2021,” Fitch said. “Changes in underwriters’ risk appetite are leading them to raise insured retentions and lowering policy limits offered that are creating challenges in placing excess layers and larger programs.”

The pandemic represents a potential for D&O claims including allegations against leadership of companies experiencing shareholder value declines or insolvencies from the economic fallout of the pandemic. Organizations that failed to protect employees or customers from exposure to the virus or serious illness could also face claims as could businesses creating protective products or vaccines.

In recent years, D&O claims have also emerged in areas including cyber events and employment practices matters where alleged negligence or poor governance practices effected corporate reputations or generated material financial losses. These can lead to more allegations of a lack of management oversight of information system security and lax risk management. Class action filings related to cryptocurrencies are also a recent phenomenon.

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