Will fragile economy make it harder for brokers to sell D&O?

A double-whammy of negative pricing shifts and claims uncertainty is hitting the Directors and Officers (D&O) insurance segment in the U.S., said a recent report from Fitch Ratings. It’s happening at a time when Canadian D&O lines are seeing some softening in pricing.

The ratings agency said “a fragile economic environment will pressure revenues and drive higher segment loss ratios in 2023.”

As a result, D&O direct written premiums (DWP) are positioned to extend a 9% decline seen during 2022, the report added. That will lead to worsening loss ratios as heightened competition has reversed pricing momentum and resulted in lower renewal rates.

Will the same be true of Canada?

In recent years Canada’s slogged through a D&O hard market characterized by restricted capacity and toughened pricing. But signs of easing emerged last fall as overall availability and affordability began to improve. Some experts even saw signs of a transition to softening.

Still, while markets are more stable than they’ve been over the last three years, Dane Hambrook, head of specialty products at Zurich, warned that challenges remain.

“There are certainly tailwinds,” he told Canadian Underwriter. “But headwinds are out there, whether its geopolitical winds, macro winds or the ESG-related sustainability issues.”

At the moment, though, brokers are “seeing interesting premium decreases” fuelled in part by carrier growth goals in addition to new markets coming into Canada, said Catherine Lanctot, senior vice president and national leader of Aon’s financial services group.

In some cases, brokers may now be seeing more multi-year deals (and, in some cases, going from two-year periods to three-year periods) as well as automatic renewals, mostly on private companies’ risk.

“We’re back to a space where carriers need to prospect and show the added value, because they need to grow their business,” Lanctot said.

Meanwhile, Fitch’s report noted D&O underwriting volatility is attributable to longer-term increases in litigation activity, defense costs and settlement trends, offset by a pandemic-induced reduction in claims.

“Federal filings for class-action lawsuits fell during the pandemic, and remain over 50% below prior peak levels,” said Fitch. “However, new sources of risk for D&O claims and litigation continually emerge as economic conditions amid evolving regulatory and legal environment, technology and social norms [continue to shift].”

U.S. industry D&O direct premiums fell 9% in 2022, driven in part by price competition from several newer market entrants. The report cited Aon’s D&O market index, which indicated primary market pricing is down 5% as of 2022 Q4.

“This change reverses the trend of improved fundamentals seen from 2018-21 that resulted in a 134% increase in DWP, driven by double-digit premium rate increases and a shift toward more restrictive coverage and underwriting practices,” added Fitch.

Plus, an increasingly fragile economic environment, combined with persistent high inflation, creates risk to the D&O market, particularly if additional bank failures, business insolvencies or a sharp downturn in equity markets should materialize this year.

“Future sources of D&O claims risk include socio-economic changes, exposure emerging related to COVID-19, cryptocurrency, cyber risk and other new technology,” said Fitch’s report. “Additionally, growing regulatory and compliance obligations expand potential for litigation tied to [environmental, social and governance] ESG [concerns], climate risks and employment practices.”

Further, ESG-related lawsuits could make their way to Canada if a U.K.-based climate lawsuit launched against Shell plc’s board of directors by NGO ClientEarth leads to ‘copycat’ litigation in Canada, lawyers warned.

“Although climate lawsuits are not new in Canada, most lawsuits to date have targeted governments and governmental actors. It remains to be seen whether any copycat suits along the lines of ClientEarth’s case will be commenced in Canada,” noted Andrew MacDougall, Jennifer Fairfax, and Ankita Gupta of Osler, Hoskin & Harcourt LLP in a recent Mondaq blog post.

If that does happen, the lawyers noted it could could affect D&O coverage.

Feature image by iStock.com/Leonid Sorokin