Best’s Market Segment Report: Directors and Officers Insurance Segment Improves, But Writers Navigating New Underwriting Challenges

Although the directors and officers (D&O) insurance segment's
performance improved in 2018, a growing number of emerging issues
represent new hurdles for underwriters, including unicorn companies due
to their lack of transparency and governance in their financials,
according to a new AM Best special report.

The Best’s Market Segment Report, titled, “D&O: Is There Really
Light at the End of the Tunnel?” notes that D&O direct premiums written
have been fairly stable for the most-recent five-year period, and
amounted to approximately $6.6 billion in 2018. Driving segment
improvement was a decline in the defense cost containment (DCC) ratio to
11.4 from 14.8 in 2017. (DCC refers to the expenses related to the
defense, litigation, or cost containment of a claim.) In addition, the
loss ratio remained nearly flat in 2018 compared with the previous year,
at 62.1.

A factor contributing to the DCC decline was a slight drop in federal
securities class action lawsuits, to 403 in 2018 from 412 in 2017, but
they remain considerably elevated over prior years. Other contributing
factors may include an uptick in rates and changes to underwriting
strategies. Loss & DCC ratios improved for just 37% of writers, but
those writers accounted for approximately 60% of written premiums in
2018. Notably, despite the improvement in loss ratios, they are still
well above the historical average of 54.1 for the last eight years.

AM Best notes that the largest D&O claim to settle in 2018 reportedly
was Petrobras, totaling $2.95 billion. Wells Fargo followed at $480
million, so the exposure to very high settlements persists. Carriers
remain concerned about rising defense costs. Even if the courts
determine no loss event has occurred (or that a claim should be
excluded), defense costs continue to grow and need to be priced
appropriately.

Additionally, a growing number of unicorns—private companies with
valuations greater than $1 billion— pose difficulties as well. In many
cases, little information of the health of these companies, past what
they choose to share, is available. Cyber, the #MeToo movement and
growing shareholder activism, as well as emerging issues such as
cryptocurrencies, will continue to challenge underwriters. Every domain,
whether it be health care, technology, public companies, utilities or
not-for-profits, has its own specific issues, and an insurer that has a
well-defined risk appetite and invests in underwriting talent with deep
knowledge will be more successful than its counterparts.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=285801.

AM Best is a global rating agency and information provider with a
unique focus on the insurance industry. Visit www.ambest.com
for more information.

Copyright © 2019 by A.M. Best Rating Services, Inc. and/or its
affiliates. ALL RIGHTS RESERVED.

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