Buyers of directors’ and officers’ liability may be getting a break from the high rates and price hikes seen over the past few years, but insurance industry rating agency AM Best says it remains see how long it takes to recover.
“Price increases in 2022 are barely enough to keep up with economic inflation, and rate increases in the fourth quarter are even lower,” AM Best observed in a new report on the US D&O market share.
Following the difficult market conditions – especially for public D&O risks – that started at the end of 2019, the D&O market stabilized in 2022 as prices increased by an average of 5% in end of the year, with a flat renewal price. Rising prices in the years before 2022 invited new capital to the market, helping to level the prices.
Although direct D&O premiums written in 2022 remain 77% higher than in 2019, the current price of the evolving and changing risks facing corporate directors and officers “may can yield premiums that prove insufficient to cover potential claims,” said AM Best.
Related: WR Berkley CEO Says Insurer Won’t Chase D&O Market ‘Down the Drain’
While there has been a decline in federal securities class-action lawsuits as the current economic climate has slowed initial public offerings (IPOs) and special purpose acquisition companies (SPACs), more lawsuits will be filed. comes as the courts return to normal following closures due to the pandemic. In addition, recent bank failures may result in larger claims for the line, and the ongoing trend of social inflation may balloon settlement amounts, AM Best said.
Related: Outlook: D&O Market Conundrum — Rate Softening With Rising Claim Severity
Recent bank failures “have led to intense scrutiny of the banks’ executive leadership and boards of directors, even though no charges have been filed,” AM Best added. “Public officials point to unsuccessful or insufficient risk management in the identification and management of interest rate risk and liquidity risk, as well as the excessive exposure of certain industrial sectors amid the energy that increase in interest, as the reasons that these banks failed. Finally, what can be the question if the managers and directors actively and consciously monitor all the relevant risks.
On the horizon, risks associated with artificial intelligence, litigation funding, and environmental, social, and governance (ESG) requirements remain potential challenges.
Although AI has benefits, its use also comes with risks of disclosure of confidential information, cybersecurity vulnerabilities, and accusations of bias. Meanwhile, the trend toward third-party litigation involvement in D&O cases has proven to increase awards and settlements.
Related: Chubb’s Greenberg: Start Questioning the Societal Benefits of Litigation Funding
Shareholder scrutiny of a company’s ESG disclosures can also lead to D&O lawsuits. “The legal costs and settlements that may result in these cases are unknown, and underwriters are taking a conservative pricing approach for these exposures,” said AM Best.
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