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U.S. D&O insurance pricing pressure to dampen performance: Fitch


April 13, 2016   by Canadian Underwriter


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Market conditions are evolving in the directors’ and officers’ (D&O) liability insurance market in the United States, with merger and acquisition activity in 2015 facilitating greater market concentration, according to a new report from Fitch Ratings.

iStock_000057022470_MediumThe report, titled U.S. Directors and Officers Liability Insurance (Market Update 2015) and released on Tuesday, noted that pricing pressures will likely challenge profitability going forward.

Three of the largest D&O writers were involved in significant acquisitions recently, particularly the creation of Chubb Limited (Chubb) through Ace Limited’s purchase of The Chubb Corporation in January. The largest D&O writers based on pro forma 2015 statutory direct written premiums are: American International Group, Inc. (AIG) with 16.7% of industry premiums; Chubb with 14.4%; and XL Catlin Ltd (XL) with 10.2%.

“D&O insurance pricing fared better than many other commercial market segments in recent years,” said James Auden, managing director of Fitch Ratings in a statement. “However, past profitability and strong underwriting capacity are promoting pricing competition that fosters less favourable underwriting results going forward.”

D&O insurance is a small specialty segment of the property and casualty insurance market, representing approximately 1% of total industry direct premiums, according to Fitch. However, this line has great notoriety relative to its size. Many large D&O claims arise from incidents that receive wide media coverage, including corporate insolvencies, large stock price declines, financial reporting irregularities or regulatory investigations.

“D&O is more volatile than other P&C product segments as policy limits and individual claim costs are relatively large and the threat of new lawsuits or claims exposures is constantly looming,” said Auden. Key sources of claims relate to securities litigation and regulatory actions and settlements. Claims based on objections to M&A actions are diminishing, Fitch noted in the statement.

The industry D&O direct loss ratio rose by 8 points to 57% in 2015. “Results in 2016 will determine whether this change in results is representative of a new trend in performance or an aberration,” Fitch said. “Loss reserve development experience significantly flattened in calendar year 2015, which may also portend a new trend that will unfavourably affect earnings going forward.”