Favorable underwriting results in the U.S. directors & officers (D&O) liability line will likely add downward pressure on rates amid decreased demand in the segment, according to a new AM Best report.

Direct premium on a monoline basis in the D&O liability segment declined for a second straight year in 2023, according to the Best’s Special Report. The underwriting performance in the segment has been favorable for three straight years, with last year’s direct loss ratio of 50.8 notching its best level in a decade.

“Following more than 10 years of soft market conditions, which left most monoline D&O risks underpriced, the significant increase in pricing from 2020 and 2021 in particular led to a notable decline in the direct loss ratio,” said David Blades, associate director, AM Best.

According to the report, strategic changes in the way insurers are underwriting current D&O liability risks suggest the loss ratio may continue to decline over the near term. 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.

Nevertheless, headwinds such as rising settlement and litigation costs, growing exposures from new technologies, and the expectation that prices will continue to fall in 2024 counter some of these positives and contribute to AM Best’s current negative outlook for the U.S. D&O liability segment.

Chief among the D&O report’s other findings:

• Broadened contract terms and the growth of social inflation, litigation funding, legal advertising and risk exposures for corporate D&O could negatively affect calendar year results.
• Excess and surplus lines writers benefited from the hard market conditions in 2020/2021, resulting in a larger share of D&O liability business being written on a non-admitted basis and led to favorable calendar-year results.
• Disclosure requirements related to potential casualty catastrophe exposures such as cyber, emerging risks such as PFAS, or climate-related litigation could lead to an increase in lawsuits for corporate D&O and worsen loss severity.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=343840.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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