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AM Best: Coronavirus Could Further Stress an Already-Stressed D&O Insurance Market


Players should expect the directors and officers insurance market to "undergo radical changes" based on 2019 results and the "unprecedented turbulence" created by the COVID-19 pandemic, according to an A.M. Best report.

A.M. Best expects that the efforts to address rising litigation and the market hardening that have been going on for a few years to continue for some time, with increases likely to be even higher in a post-COVID-19 world. Rates for the directors and officers insurance market jumped by 44 percent in the 2020 first quarter, according to the report.

A.M. Best pointed out that insurers in the space were already reviewing their underwriting, identifying profitable niches and increasing prices to address deteriorating results. Now that the coronavirus pandemic is in full swing, those efforts will accelerate in the months ahead, A.M. Best analysts said.

"We can expect triple digit increases in a post-COVID world, as insurers respond to legacy issues such as increased litigation, litigation financing and keeping up with emerging claims and litigation due to COVID-19," the A.M. Best report noted.

"The need for rate increases in the supply side will also gather momentum from the demand side as corporations recognize the need for well-crafted and comprehensive D&O insurance," A.M. Best added.

Before and After COVID-19

According to A.M. Best, D&O liability underwriters have seen a number of challenges in recent years, including more lawsuits and larger jury and settlements. A steady jump in both loss and defense and cost containment expenses relating to the defense, litigation or cost containment of a claim have played a big role.

As a result, underwriters of public company D&O in particular have been reassessing their risk selection and pricing as they are faced with more securities class action lawsuits, event-driven litigation, emerging exposures and litigation financing, the report explains.

Then came COVID-19. As A.M. Best noted, the pandemic has disrupted businesses and financial markets globally, leading to market panic, uncertainty and challenges in generating "meaningful near-term forecasts."

"Messages from federal and state governmental leaders have been changing rapidly, sometimes on a daily basis, leading to a heightened level of unease regarding just how long business operations in the U.S. are going to be sidelined," A.M. Best said. "For the D&O segment, the level of uncertainty is amplified by the considerable level of strain it already faced coming into 2020."

A.M. Best said it expects a longer tail for claims from the 2020 calendar year, due in part to protracted litigation.

"It's likely that the COVID-19 pandemic will ultimately lead to greater complexity regarding emerging D&O claims and litigation issues," said David Blades, associate director, industry research and analytics. He said the "inherent complexities of unique COVID-19 claim scenarios" could lead to protracted litigation for many claims. "What that'll do is it'll cause the 2020 claims, and particularly 2020 D&O claims, to have an extraordinarily long tail. So that's something that we're looking at as things go forward," he said.

Blades said D&O insurers could be facing possible claims over company responses to the pandemic and any failures to protect against substantial financial losses. Other potential claims might concern misleading disclosures relative to the pandemic, government investigations into applications for pandemic relief, and claims stemming from the financial troubles of travel, leisure, hospitality, retail and other sectors hit hard by the pandemic and lockdowns.

Bankruptcies or insolvencies could increase the risk of companies being sued by creditors, Blades added.

Also, extreme financial market volatility could create more volatility regarding claims, with more securities class actions, shareholder derivative litigation and other claims against directors and officers becoming more likely.

Sridhar Manyem, director of industry research and analytics, said COVID-19 may test the wording of policies.

"Standard D&O wording may not apply to specific risks associated with COVID-19, but will apply to traditional D&O perils, including those triggered by COVID-19 events," Sridhar Manyem, director of industry research and analytics for A.M. Best, said in prepared remarks. "Such 'silent COVID-19' coverage may not expressly address pandemic perils, but may still respond to them."

A.M. Best does not expect better conditions anytime soon. It said that price increase momentum should continue well into 2021.

Insurers can succeed "with a well-defined risk appetite" along with "refined" pricing strategies and risk selections. But due to COVID-19, even the ones doing relatively well will face unusual stresses, A.M. Best said.

The full A.M. Best Market Segment Report is "Accelerating Trends, Unprecedented Turmoil Could Lead to Seismic Change for D&O Industry."

Source: A.M. Best