For insurers handling U.S. directors and officers liability, Fitch Ratings has bad news and good news, both relating to the coronavirus pandemic.

First, the bad: Underwriting losses will likely continue in the near term, a reality Fitch explained in a new update is worsened by pandemic-related claims “which will take several years to fully pay out.”

Here’s the good: Fitch said that individual carriers in the D&O space face limited risk to their ratings. That’s because carriers with a large amount of D&O premiums “are larger, diversified entities.” According to Fitch, the 10 largest D&O writers held a combined 67 percent share of all direct statutory premiums. Thirty-seven individual organizations “wrote greater than $10 million of D&O premiums,” according to the ratings agency.

Longer-range, Fitch said, there’s a light at the end of the tunnel.

“The recent sharp changes in the underwriting environment and pricing is supportive of improving profitability post-pandemic, which will also depend on the path of the economic recovery,” Fitch ratings said.

D&O Struggles Predate COVID-19

As Fitch points out, D&O underwriting has suffered for many years, stung in part by competitive pricing. But multimillion-dollar jury verdicts and claims settlements have increased for years, and D&O insurers also have faced rising defense-related losses. Fitch said that the sector sustained statutory underwriting losses for three consecutive years from 2017 through 2019. In that third year, the collective D&O combined ratio was a painful 106.6.

D&O insurers saw direct written premiums grow by 22.5 percent for the first half of 2020, and expectations are that pricing momentum will fuel revenue growth through 2021 as well. But with changes in underwriters’ risk appetite, insurers are raising “insured retentions and lowering policy limits offered” in such a way that there are “challenge in placing excess layers and larger programs,” Fitch said.

While D&O challenges predate the COVID-19 crisis, Fitch said the coronavirus pandemic will cause many potential claims problems for the sector in the months ahead.

Fitch said that D&O insurers in particular could face pandemic-related claims cases involving shareholder value declines or insolvencies, or claims alleging employers didn’t adequately protect employees or customers from exposure to the virus. Even companies creating protective products or vaccines and potential treatments are exposed to new D&O exposures, Fitch said.

Beyond COVID-19

D&O insurers aren’t just bracing for more coronavirus claims. According to Fitch, the sector is dealing with new emerging claims in areas including cyber events and employment practices. Claims in those cases would be triggered by allegations of negligence or poor government practices that sullied corporate reputations or caused significant losses.

Even cryptocurrencies are creating new D&O risks, Fitch said.

Source: Fitch Ratings