interviews and at recent industry events, D&O participants said that while 2024 should be a year of smaller rate declines than 2023 there is unlikely to be a market sea change, barring an unforeseen economic event.
“I do think [rate change in 2024] probably will show a slowdown over 2023. But it still looks like it's heading in the ‘savings for clients’ direction, absent some sort of big change,” Andy Doherty, USI’s national executive and professional risk solutions practice leader, told this publication.
Capacity remains abundant, with carriers aiming to hold on to premium after enjoying what at least for now look like profitable years that benefited from a 2019 to mid-2022 hard market and relatively low loss ratios.
However, the continuous rate decline is playing out against the backdrop of a challenging claims landscape, with soaring legal costs and larger securities class action verdicts significant concerns.
Meanwhile, pre-2020 accident years remain a question mark given social inflation, with many carriers reporting significant reserve charges in Q4 earnings, including from professional lines.
Other market issues being followed closely are the impact of new SEC regulations and reinsurer appetite for D&O risk in the current rate environment.
Rates
The public D&O rate environment is bifurcated between companies that more recently completed IPOs or de-SPAC transactions, and established large public companies, Brian Hood, EVP, executive liability at CAC told this publication.
Rate declines for the former cohort can be in the 20%-25% range, while for the latter recent rate decreases are in the 0-10% and, more commonly, the 0-5% range.
The latest publicly released quarterly rate data from Aon, which was for Q4 2024, still showed double-digit declines overall, but sources noted that the significant de-SPAC and recent IPO declines could skew the overall picture.
That’s because newer public companies saw significant rate increases during the D&O hard market that are now unravelling, especially for companies more than two years past their public debuts.
Contrary to the start of the current soft market cycle, carriers are pushing back harder on rate declines or even walking away from business in the higher excess layers, given the significant reductions seen there already.
There is some evidence that carriers are willing to compete somewhat on price on primary and excess layers, as established carriers aim to hold on to those positions.
This comes as both carriers and insureds are having to take into account soaring legal costs which means that, in the event of litigation, the primary and even secondary layers can be “eaten up” by those costs, sources said.
“What that tells us is that you want strong experienced carriers, not only in your primary, but first couple of excess that are used to that, that have claims staff and the experience to handle that and think about it the right ways,” Doherty said.
Some sources said that middle excess could now be a challenging position for less-established carriers as these layers are tapped more frequently given legal costs and social inflation.
Carrier executives at the D&O Plus Conference in New York earlier this month noted that judging by their willingness to underwrite risk, most markets still believe there is rate adequacy, but that further double-digit declines will quickly change that picture.
Executives also cautioned that significant further rate deterioration could mean another “hockey stick” rebound as followed the last soft market, with about 100% in price gains seen over the two-and-a-half-year stretch.
Rate declines have been smaller on separate Side A-only coverage compared to more typical ABC policies, CAC’s Hood said.
Coverage, meanwhile, remains “as broad as it’s ever been”, a source noted, and that’s unlikely to change in a soft market likely to continue for the foreseeable future.
Capacity
There has been no notable decrease in capacity in the D&O market, and a significant shift seems unlikely in the near term.
"In the next 12 to 18 months or so the markets will be oversubscribed by more than one or two, or even five markets, and so there will have to be an awful lot of M&A activity to really move the needle,” one source said.
Carrier executives during the Plus opening panel said capacity reductions have happened via limit contractions, and that the pre-hard market limits of $25mn would not return.
But sources said that while those $25mn limits aren’t currently in the market, carriers have quietly made small increases in line sizes to meet their premium goals.
Other than consolidation or a major exit, increased IPO activity could help generate demand to meet additional capacity. But the signs for that in 2024 are not promising, unless there is a major change in the economy, sources said.
Reinsurers meanwhile are assessing their support of the D&O market, with some having been vocal last year on deteriorating rates. TransRe, for example, called the D&O market “unhindered by logic”.
Sources have reported little notable change in reinsurance capacity, but AM Best said in its D&O downgrade report that “reinsurance rates must go up to offset the inflationary impact on excess layers”.
Given the lack of demand, US D&O premiums overall shrunk by over 15% in 2023 to just under $11.5bn, according to statutory data.
Among carriers that saw significant reductions, Axa XL’s D&O DWP fell by over $700mn from 2022 while WR Berkley notched an almost $160mn decline.
CEO Rob Berkley has been outspoken in questioning the logic of continued D&O rate declines.
Claims trends
Sources said that while securities class action filings in 2024 may not exceed 2023 levels significantly, increasingly large verdicts are concerning D&O insurers.
Discussions at Plus centered around the possibility of $1bn verdicts occurring and becoming more common, though sources noted average severity overall also seems to be increasing, as this publication has previously reported.
Loss ratios for recent accident years are relatively low, according to public data, though they likely haven’t fully developed yet and could also be affected by a Covid-related delay.
“The current pricing environment may prove unsustainable based on developing losses and how those losses affect company underwriting results prospectively,” AM Best senior financial analyst Elizabeth Blamble wrote in a recent report in which the ratings agency gave D&O a negative outlook.
Also on the claims front, Doherty said that derivatives settlements are becoming more of a worry after having been mostly an afterthought in the past. They affect mostly Side A-only policies that carriers may have thought “safe”, he added.
Other issues
D&O market participants are watching climate risk regulation from the SEC closely as to its market impact. It could lead to more company exposure, and therefore demand for coverage, but also more claims.
Given that the regulation is in its infancy, there is little direct impact yet, and the SEC’s cybersecurity rules may be more impactful short term, sources said.
There is unlikely to be significant product innovation this year, sources said during Plus, but D&O underwriters will take advantage of technologies such as AI to make better decisions.
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