Profitability of D&O underwriting set to remain under pressure – AM Best

The profitability of directors and officers (D&O) insurance underwriting is likely to remain under pressure in the near term, due to factors that include multiple years of inadequate pricing and widening risk exposures brought on from social inflation, cyber liabilities and ESG issues. This is according to a new Best’s Market Segment Report, Expanding Risk Exposures Present D&O Insurers with Significant New Challenges, from rating agency AM Best.

The report says that the risk exposures that underwriters of D&O liability face have expanded significantly in recent years, in the increasingly complex and interconnected business environment.

“Escalating litigation and regulatory risks present growing challenges while new, event-driven exposures have emerged,” states the report. “These dynamic market conditions are likely to continue developing over the next three to five years, testing the ability of insurance companies to accurately assess, underwrite, and price for these exposures.”

The report states that social media has played a key role in raising awareness of sexual harassment. Litigation has increased rapidly, as the #MeToo movement has gained momentum.

“To combat the proliferation of these types of claims, corporations may use proactive measures such as training across the organisation, including simulated scenarios,” states the report. “From a risk management perspective, further educating employees and managers about potential misconduct or harassment issues will help companies get ahead of potential disputes—an approach considered part of prudent risk management for D&O insurers.”

The report also notes that Cybersecurity risks are among the top concerns of corporate officers. “No longer are such breaches treated solely as information technology (IT) issues,” it states. “Cybersecurity and protecting personal data from potential breaches are now considered key responsibilities of senior management, thus increasing the exposure of a firm’s D&O insurer to cyber-related claims. Such claims include those against the officers of companies for failing to disclose cyber breaches, making appropriate cyber risk management disclosures, as well as not having cyber insurance in place.”

The report concludes that the professional liability market appears to be in a state of transition following almost a decade of soft market conditions. Insurers migrated to the segment attracted by its historically positive underwriting results. Over the last several years, the segment—and the D&O and Employment Practices Liability Insurance markets (EPLI) specifically—have seen risks arise without much pressure to address rates to offset these new exposures.
“That reality, compounded by factors such as social inflation, has created a minefield of potential litigation for professional liability insurers to navigate,” the report states.