Rates for the struggling Directors and Officers insurance market jumped by 44 percent in the 2020 first quarter. Expect that market hardening trend to continue for some time, with increases likely to be even higher in a post-COVID-19 world, A.M. Best said in a new report.
It’s not like the D&O segment was doing well before COVID-19. A.M. Best pointed out that insurers in the space were already increasing prices and taking other underwriting actions to address deteriorating results. Now that the coronavirus pandemic is in full swing, those efforts will accelerate in the months ahead, it said.
“We can expect triple digit increases in a post-COVID world, as insurers respond to legacy issues such as increased litigation, litigation financing and keeping up with emerging claims and litigation due to COVID-19,” the A.M. Best report noted.”
A.M. Best said it expects a longer tail for claims from the 2020 calendar year, due in part to protracted litigation.
“The need for rate increases in the supply side will also gather momentum from the demand side as corporations recognize the need for well-crafted and comprehensive D&O insurance,” A.M. Best added.
Before and After COVID-19
According to A.M. Best, D&O liability underwriters have seen a number of challenges in recent years, including more lawsuits and larger jury and settlements. Where does this trend come from? A.M. Best said that a steady jump in both loss and defense and cost containment expenses relating to the defense, litigation or cost containment of a claim have played a big role. As a result, underwriters of public company D&O in particular have been reassessing their risk selection and pricing as they are faced with more securities class action lawsuits, event-driven litigation, emerging exposures and litigation financing, the report explains.
Then came COVID-19. As A.M. Best noted, the pandemic has disrupted businesses and financial markets globally, leading to market panic, uncertainty and challenges in generating “meaningful near-term forecasts.”
“Messages from federal and state governmental leaders have been changing rapidly, sometimes on a daily basis, leading to a heightened level of unease regarding just how long business operations in the U.S. are going to be sidelined,” A.M. Best said. “For the D&O segment, the level of uncertainty is amplified by the considerable level of strain it already faced coming into 2020.”
A.M. Best expects a related issue in the months ahead: the risk of inadequate disclosures concerning how D&O cover may or may not address pandemic perils.
“Standard D&O wording may not apply to specific risks associated with COVID-19, but will apply to traditional D&O perils, including those triggered by COVID-19 events,” Sridhar Manyem, director of industry research and analytics for A.M. Best, said in prepared remarks. “Such ‘silent COVID-19’ coverage may not expressly address pandemic perils, but may still respond to them.”
As well, A.M. Best said that extreme financial market volatility could create more volatility regarding claims, with more securities class actions, shareholder derivative litigation and other claims against directors and officers increasingly likely.
A.M. Best does not expect better conditions anytime soon. It said that price increase momentum should continue well into 2021.
Insurers can succeed “with a well-defined risk appetite” along with “refined” pricing strategies and risk selections. But even the ones doing relatively well will face unusual stresses, A.M. Best said, thanks to COVID-19.
The full A.M. Best Market Segment Report is “Accelerating Trends, Unprecedented Turmoil Could Lead to Seismic Change for D&O Industry.”
Source: A.M. Best