D&O results not expected to improve in 2003: A.M. Best

Insurers writing directors’ & officers’ (D&O) coverage will not expect substantially improved underwriting results in that line, predicts a new report by A.M. Best. In “The Directors & Officers Market: A Crisis in Remediation”, the rating agency notes that deterioration in the market over the last several years should carry into this year, despite continued price increases and some carriers withdrawing from the market.
Although the current “crisis” does not measure up to the liability crisis of the mid-1980s, A.M. Best quotes the Tillinghast-Towers Perrin premium index of 11% average hike in 2000, followed by 29% hikes on average in both 2001 and 2002.
But before premiums were jacked up, the industry had seen at least five years of inadequate pricing, with premiums dropping almost 38%. “While D&O pricing remained robust in 2002, this continued strong pricing will take at least another year to be fully realized as premium earned, and it appears insufficient to turn around near-term underwriting results for most D&O insurers,” states a release on the study.
Unlike the mid-1980s, there does seem to be more surplus capacity available to write D&O, and a greater number of insurers and reinsurers with expertise in the line. However, given the sins of the past, a “lengthy period of remediation” is likely.
“2003 is expected to be characterized by continued heightened reserve strengthening by most D&O writers and additional partial or full market withdrawal by some,” the release notes. “While insurers that historically have reserved conservatively might be exceptions, the trends in frequency and severity on more recent accident years are almost certain to absorb the margins from prior accident years and delay the restoration of any meaningful cushion.”
A.M Best expects negative ratings pressure on those companies whose earnings are dependent on D&O, and who see significant adverse loss-reserve development and cannot restore capital.