The D&O market has been in the spotlight for its pricing volatility since 2020, with dramatic hardening in 2020 and 2021 quickly supplanted by a downward rating spiral in 2022 and 2023, after a swathe of new capacity entered the market.
Looking ahead to 2024, there is hope across the market that rating levels will be more stable, with sources coalescing around an expectation of single-digit declines, preventing the market from a slide into widespread unprofitable underwriting.
This compares to a prolonged period where pricing has commonly been falling by over 20%.
“We have had two years of rate recalibration and generally rates are still adequate, but I don’t think 2024 warrants another year like the last two,” said Paul Shore, CEO of Tegron Specialty.
“Everyone is hoping for some kind of stability in 2024: brokers, clients and underwriters.”
Sources said there were early signs of pricing resilience in primary business, whilst major carriers are increasingly prepared to walk away from deals they deem to be underpriced, an indication that desperation to hit top line targets is receding.
Underwriting manager for D&O in the UK at Liberty Specialty Markets Emma Pearce said there was a need for prices to stabilise to reflect the current risk environment, and to avoid volatility in the longer term.
“After two to three renewal cycles of significant discounts we believe prices need to stabilise to reflect the forward-looking risk environment facing D&O’s in their various legal jurisdictions,” Pearce said.
“A continued depression of pricing which is not aligned to the pricing of risk but driven by the oversupply of commodity capacity in the market will lead to increased volatility in the longer term.”
There was widespread agreement that claims activity is set to ramp up after a lull during the pandemic, with securities class actions rising in the US, and emerging risks driven by factors including geopolitical and economic turmoil as well as litigation relating to artificial intelligence and ESG.
However, there was not universal optimism about the prospects for the class of business in 2024.
More skeptical sources highlighted that there had been no material reductions of capacity in the market, which would keep competition high and pricing competitive.
In particular, excess layers are still seeing high levels of competition, including from a proliferation of smart follow arrangements in Lloyd’s, which some sources said was likely to endure in 2024.
From feast to famine
The D&O market first began hardening in 2016 as huge losses started flowing through from underpriced prior years, but the rating momentum surged following the onset of the pandemic, leading to what was described at the time as the “hardest of hard” D&O markets.
Hardening was driven by major cutbacks in capacity, with the likes of Axa XL pulling out of the class in London, and incumbent carriers slashing line sizes.
But the extent of pricing momentum attracted new capacity to the class of business, and by the end of 2021 some opportunistically priced deals began to experience rate softening.
The combination of significant top-line income targets in 2022 and a collapse in new business following Russia’s invasion of Ukraine led to large rating decreases, which have continued ever since.
Such has been the speed of rating decline – against a backdrop of market hardening in most of the wider P&C sector – that the class of business has attracted outspoken commentary from executives.
The subject of D&O pricing is frequently highlighted in quarterly earnings calls, and Lloyd’s market messages have been especially robust when discussing the sector.
In late September, Lloyd’s chief of markets Patrick Tiernan provocatively labelled certain underwriting practices in the D&O marketplace “moronic”, “irrational” and “shambolic”.
In the most recent market message at the end of November, Tiernan said that the D&O market would remain one of the Corporation’s oversight focuses in 2024, and that premium income is expected to shrink in the class of business.
Sources said the acceptance of reduced income was a positive development for a market which has seen price gouging through participants chasing top-line targets.
The only new capacity lined up to enter the Lloyd’s market so far is from Westfield Specialty, which has built a team of underwriters from Aviva.
Primary versus excess
Sources identified that there was a divergence in underwriting conditions between primary and excess business, and that the difference could become starker.
Rating is already holding up more for primary layers, and sources said that clients opting to switch leader was becoming more infrequent. Broking sources said that clients set a high bar for choosing primary carriers with appropriate claims expertise.
However, excess competition is much more about capacity and price, which has led to increased limit factors (ILF – the difference in rating between layers) falling fast.
“We definitely see more rating adequacy on primary layers where relationships and knowledge sharing with clients is stronger – from an excess perspective we are seeing very fast turnaround times and competitive ILF pricing,” said Liberty’s Pearce.
“The real test for rate adequacy on the excess book will come in four to five years when the tail on claims starts to develop.”
Sources said that the trend towards rising settlements and jury awards meant that excess layers are still vulnerable to be stung in the event of a claim.
Broking sources said that excess competition was also being driven by the increasing use of smart follow arrangements in Lloyd’s.
Claims headwinds
Claims activity during the pandemic proved relatively benign, with the number of securities class actions filed in the US falling off significantly, another factor expected to contribute to two highly lucrative years of underwriting.
However, sources warned that claims are once again trending upwards, both from US securities suits, but also emerging areas of exposure.
A report from Allianz Commercial published earlier this week said companies faced an increased threat of litigation in 2024 from numerous fronts.
Allianz Commercial’s global head of financial lines Vanesa Maxwell said: “The higher cost of refinancing debt is proving a shock. Insolvencies are rising, geopolitical uncertainty is considerable, cyber risk is elevated and ESG claims are here to stay and proving challenging.”
Given these factors, underwriters in the market sorely hope that next year will not follow the same pricing trajectory as 2023.
Otherwise, the market would risk falling back into the loss-making conditions that it took so much hard work to remediate.
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