Record premiums haven't been enough to reverse U.S. directors and officers (D&O) insurers' underwriting losses, and the sector will still lose money in the near term as a result, Fitch Ratings said.
Premium growth for D&O coverage has been significant. D&O direct written premium volume jumped to $10.7 billion in 2020. Premiums grew by 40% in 2020 and 20% in 2019, Fitch noted, following several years of flat to declining revenue growth.
Just in the last three quarters of 2020, D&O renewal premium rate increases averaged nearly 16 percent, according to data Fitch cites from the Council of Insurance Agents & Brokers' Commercial Insurance Market Survey.
Underwriting performance remained disappointing, however.
The industry direct incurred loss and defense and cost-containment ratio (DCC) for the sector dipped a bit to 74% in 2020. Fitch explains that a loss and DCC ratio averaging 75% from 2017 to 2020 offers evidence of deterioration in results during the period.
By contrast, there was a 61% average rating during 2011 to 2016.
Fitch Director James Auden said the contrast likely won't lessen anytime soon.
"The industry direct loss ratio moved only slightly lower in 2020 despite 40 percent growth in written premiums and still remains at a level corresponding to significant underwriting losses," Auden noted in the report. "Premium rate increases are bound to continue based on these results and ongoing loss uncertainty tied to claims related to the pandemic and other emerging areas."
The report notes that it will take some time for the claims picture related to the coronavirus pandemic to develop. However, D&O litigation risk continues to grow in other areas including environmental, social and corporate governance (ESG) practices and cyber risk management. Also, an active merger and acquisition environment in 2021, along with a spike in new public stock offerings, could add to the risk picture.
The 10 largest D&O writers held a combined 64 percent share of direct premium at the end of 2020. Market leader AXA XL produced a Direct Loss and DCC ratio of 67.5 percent in 2020, while No. 2 Chubb managed an 88.5. Third-ranked AIG's was 74.3, and No. 4 Tokio Marine U.S. was 66. Fifth-placed Fairfax Financial Holdings produced a Direct Loss and DCC ratio of 56.9, according to S&P data cited by the Fitch report.
The full report is "U.S. Directors and Officers Liability Market Update: Rate Increases, Premium Growth Fail to Cure Profit Ills."
Source: Fitch Ratings