D&O Insurance Pricing Trends Catching Up

Fitch Ratings-New York/Chicago-30 April 2013: The directors & officers liability insurance (D&O) and professional liability business is generating accident year underwriting losses on an accident year basis for the industry despite recent stability in loss ratios, according to Fitch Ratings. D&O premium rates were previously lagging the market recovery in the broader commercial lines segment, but pricing trends are now catching up.

Aggregating D&O supplement data to analyze industry aggregate underwriting results show direct written premium grew by approximately 6% in 2012, and the industry’s direct loss ratios improved by two points to 49%. Aon Corp.’s D&O Pricing Index shows that rates in fourth-quarter 2012 were 9.9% above the prior-year quarter.

D&O insurance is a small specialty segment of the property/casualty insurance market that represents only 1% of total industry premiums. However, it is a more volatile product line than other property/casualty product segments, as policy limits are relatively large and the threat of new lawsuits or sources of claims is always looming.

D&O market activity is concentrated within a smaller number of larger insurers as it requires unique underwriting and claims expertise, a willingness to write relatively large policy limits and corresponding potential claims severity. As of year-end 2012, the largest direct writers of D&O coverage in the U.S. were American International Group, Inc., XL Group Ltd, The Chubb Corporation, HCC Insurance Holdings and Travelers Companies, Inc.

Key sources of claims relate to securities litigation and regulatory actions and settlements. More recently, claims related to mergers and acquisitions have been a source of material losses for D&O insurers. Many large D&O claims arise from episodes of corporate malfeasance or regulatory investigations that receive wider coverage in the business and mainstream media. These characteristics help explain why D&O insurance has greater notoriety than its modest stature would imply.

Our forthcoming special report, “Director & Officers Liability Insurance – Market Update 2012,” uses data gathered from the D&O supplement to statutory financial statements to provide in-depth analysis of D&O written premium growth and loss ratio trends.

The report also compares underwriting results for the largest U.S. D&O underwriters and provides in-depth analysis of D&O pricing trends and current issues driving class action filings that could impact D&O underwriting results going forward.

For more information regarding this article and D&O Insurance please contact Greg Shields at Mitchell Sandham Insurance.

Greg Shields is a D&O, Professional Liability, Employment Practices Liability, Fiduciary Liability and Crime insurance specialist and a Partner at the University and Dundas (Toronto) branch of Mitchell Sandham Insurance Services. He can be reached at gshields@mitchellsandham.com 416-862-5626, or Skype at risk.first.

CAUTION: This article does not constitute a legal opinion or insurance advice and must not be construed as such. It is important to always consult a registered and truly independent insurance broker and a lawyer who is a member of the Bar or Law Society of the relevant jurisdiction with regard to this material before making any insurance or legal decisions. All material is copyrighted by Mitchell Sandham Inc. and may not be reproduced in any form for commercial purposes without the express written consent of Mitchell Sandham Inc. Anyone seeking to link this document from any external website must receive the consent of Mitchell Sandham Inc. by sending an e-mail to gshields@mitchellsandham.com