Three years of soaring directors and officers liability insurance prices pushed combined ratios down to the mid-to-high 90s, but new entrants and potential claims volatility may spell trouble for underwriters in the years ahead.

Updating an earlier report on the U.S. D&O insurance market with data for the first-half of 2022, Fitch Ratings calculated the direct loss ratio for the first six months of the year to be 53.4, compared to 54.7 for the comparable period in 2021 (and for the full-year 2021)—putting the combined ratio in the mid-90s range. The improvement was accompanied by at 22 percent jump in earned premiums, according to the rating agency’s analysis of industry aggregate statutory supplement data (from S&P Global Market Intelligence)

Direct written premiums, however, headed downward for the first time in years—falling to $6.0 billion for the first six months of 2022, compared to $6.2 billion for first-half 2021, Fitch said.

“After recording market direct written premium expansion of over 130 percent from 2018 to 2021, growth has begun to reverse in 2022, with premium volume down by 2.7 percent in 1H22 YoY, and a flat to negative trend likely to persist in the near term,” Fitch analysts commented in their Aug. 31 article, “D&O Insurance 1H22 Results Improve, Premium Growth Stalls.”

By raising prices and taking various underwriting actions (lowering limits, hiking retentions and adding coverage exclusions), D&O carriers have been able to bring loss ratios down from levels above 60 in 2017 and 2018 to the mid-50s now. But Fitch sees rate momentum subsiding, as recent entrants expand underwriting capacity.

The expanded capacity and potential claims volatility from multiple sources “reduce the likelihood that current underwriting gains will last,” the article says.

Aon’s Data on D&O Pricing

As evidence of declining rate momentum, the Fitch article cites Aon’s quarterly public D&O pricing index, which fell 0.5 percent for second-quarter 2022 (compared to second-quarter 2021) for primary policies renewing with the same limit and deductible. In contrast, Aon’s second-quarter 2021 index indicated a 14.2 percent jump over second-quarter 2020 for primary policies renewing with the same limit and deductible.

Presented differently, the Aon report reveals that just 37 percent of clients reported primary price increases (for policies with the same limit and deductible) in second-quarter 2022, compared to 98 percent in second-quarter 2021.

The Aon report, published in early August, graphically shows that the primary index drop of 0.5 percent was the first one since fourth-quarter 2017. In other words, there was an unbroken string of increases in the quarterly index for more than four years—until second-quarter 2022.

The report highlights a similar second-quarter interruption in price index declines when analyzing price trends related to the overall D&O programs purchased by Aon clients—not just the primary policy, but also excess layers and side-A only policies. Comparing only programs that renewed in both second-quarter 2022 and second-quarter 2021, the overall program pricing index decreased 7.6 percent in second-quarter 2022, compared to second-quarter 2021.

(Editor’s Note: The report initially references a 14.7 percent decline in the overall index. After presenting that figure, however, the text of the report goes on to reference the unusual impact of two large clients that bought 18-month polices in second-quarter 2021, suggesting that the 7.6 percent figure for only programs renewing in the most recent year second quarter is more meaningful.)

Profit Declines Ahead?

The Fitch article stresses that pricing levels must keep pace with loss trends to ensure long-term profitability, adding that difficult-to predict loss trends could rise amid higher inflation and lower economic growth.

“An economic recession that includes sharp equity market declines and an increase in corporate insolvencies and failed mergers provides substantial fodder for D&O claims,” the article notes, also referring to the possibility of a larger volume of lawsuits for special purpose acquisition companies and to potential D&O suits related to employment practices, cyber threats, climate risk, and cryptocurrencies.