D&O insurers are under pressure, but big enough to handle pandemic claims, Fitch says

As claims related to the economic fallout of the pandemic emerge in the U.S. Director and Officers Liability (D&O) segment, insurers can expect claims to take several years to settle and underwriting losses to continue shortly. term, according to Fitch Ratings.

However, there is limited risk to individual D&O insurers’ valuations following pandemic-related claims, Fitch said, adding that carriers with significant D&O premiums are larger and more diversified entities.

Furthermore, recent price changes support improved post-pandemic profitability, which will depend on the path of economic recovery.

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

Years of losses

Underwriting performance for the segment was hit by many years of competitive pricing and the continued rise in multi-million dollar jury verdicts and claims settlements, as well as rising defense costs. Fitch estimates that D&O reported legal underwriting losses for three consecutive years from 2017 to 2019, including a direct combined ratio of 106.6% in 2019.

Woodruff Sawyer explores D&O litigation and insured understanding

In 2019, insurance agency Woodruff Sawyer predicted the increase in D&O premiums, the first increase in nearly 10 years, and predicted it would continue through 2020 and beyond. Today, the broker says that increase shows no signs of waning as collective action lawsuits and record settlements, corporate bankruptcies and COVID-19 continue to impact an already difficult market.

To add further pressure, insurers are looking at more than 600 class action cases on unsolved securities making their way through the court system, Woodruff-Sawyer says.

Woodruff Sawyer’s survey of the underwriter reveals that underwriters are concerned that their policyholders are not fully aware of the high cost of litigation, with 83% of underwriters saying they believe companies underestimate current risk. “This does not bode well for insurance renewals for riskier customers – recently IPOed tech and biotech companies – whose volatile stock prices often make them targets for shareholder disputes,” the agency says.

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

While renewal rate prices have skyrocketed, the results remain under pressure with the direct loss ratio climbing to 62% in the first half of this year, the highest mid-year level in 10 years. The Council of Insurance Agents & Brokers’ commercial market survey indicates that D&O renewal rates rose 16.8% in 2Q20 versus a 4.3% increase in 2Q19. Rates on excess hedges are rising at a faster rate.

“Direct written premiums were up 22.5% for the first half over the same period last year, with” pricing momentum set to push revenue growth through 2021, “Fitch said. Underwriters’ risk appetite is leading them to increase insured withholdings and lower policy limits offered which are creating challenges in placing excess tiers and larger programs. “

The pandemic represents potential for D&O claims, including allegations against the leadership of companies experiencing declines in shareholder value or insolvencies due to the economic fallout of the pandemic. Organizations that have failed to protect employees or customers from exposure to the virus or serious illness may also face compensation claims, as do companies that create protective products or vaccines.

In recent years, D&O complaints have also emerged in areas such as cyber events and employment practices issues where alleged negligence or poor governance practices have impacted corporate reputation or generated significant financial losses. This can lead to multiple allegations of management’s lack of control over the security of the information system and lax risk management. The class action statement related to cryptocurrencies is also a recent phenomenon.

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