The U.S. directors and officers (D&O) liability insurance market segment is facing a negative outlook, according to AM Best, with increasing competition leading to more capacity and lower pricing, as well as rising legal expenses and regulatory pressures.

AM Best’s sector report indicates a challenging environment for D&O insurers, with premium volume down nearly 20% from its 2021 peak of $14.9 billion. The decline in demand for transactional coverage, fewer initial public offerings, and lower pricing are key factors driving this decrease. AM Best predicts that the premium for the full year of 2023 will reach $12 billion, with the direct loss ratio for the third quarter of 2023 at 51.5, potentially the lowest in nine years.

Elizabeth Blamble, senior financial analyst at AM Best, noted, “The current pricing environment may prove unsustainable based on developing losses and how those losses affect company underwriting results prospectively.” This statement reflects the growing concerns around the sustainability of the D&O market in the face of increasing competition and regulatory pressures.

The report also highlights the challenges faced by U.S. corporate directors and officers in recent years, including inflation and interest rate risk, equity market volatility, and adverse legal trends related to social inflation and litigation funding. These factors have made managing loss frequency and severity trends difficult for D&O insurers.

In addition to these challenges, the D&O market has seen an influx of additional capital from new and existing carriers seeking to expand their writings. However, a decreasing number of IPOs has led to a drop in demand for coverage. This, coupled with the growth of companies unencumbered by legacy claims, has resulted in highly competitive conditions with supply outpacing demand.

Christopher Graham, senior industry analyst, warned, “Given the impact of economic inflation, social inflation, and litigation funding, D&O insurers’ prior accident year reserve development could become adverse.” This statement underscores the potential risks facing the D&O market, as insurers grapple with a complex and challenging environment.

Learn more about the full report here. &

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