Insurers likely to weather impact from virus-related D&O claims
Despite the COVID-19 pandemic adding extra strain to a segment facing increasing threats, insurers may be able to offset losses.
Directors and officers (D&O) insurance has faced a lot of scrutiny during the COVID-19 pandemic, as claims arising from government-mandated shutdowns and return-to-work risks continue to mount.
According to Fitch Ratings, underwriting losses will likely continue over the near term for the U.S. D&O liability insurance, with claims payouts taking years to complete. On the brighter side, Fitch sees limited risk to the ratings of larger, more diversified insurers in the D&O segment.
D&O underwriting impact
For the past few years, underwriting performance in D&O has been hit negatively by increasing market competition, nuclear verdicts, and rising defense costs and claims settlements.
Fitch estimates the D&O segment reported statutory underwriting losses from 2017 through 2019, including a 106.6% direct combined ratio in 2019. The direct incurred loss ratio also increased to 62% in first-half 2020 — the highest midyear level in 10 years, says Fitch, despite rising renewal rates. A survey from The Council of Insurance Agents & Brokers indicates that D&O renewal rates moved 16.8% in Q2 2020 versus a 4.3% increase in 2Q19.
Those increases motivate some companies to move their risks to a captive insurer, such as Tesla, which announced earlier this year that Elon Musk would personally provide the Tesla board D&O coverage.
Also, as more trends adversely affect the D&O space, insurers’ are changing their risk appetite. This has caused some to raise retentions and lower policy limits, causing challenges for insureds in need of more extensive programs.
Claims to come
One of the most likely D&O claims to emerge from the pandemic will be allegations from company leaders experiencing shareholder value declines or insolvencies from the economic downturn. “Claims may also be pursued against organizations that failed to protect employees or customers from exposure to the virus or serious illness. Entities creating protective products or vaccines to prevent the virus or treatments for afflicted individuals that prove ineffective also face unique new D&O exposures,” Fitch explains.
Traditional risks also remain of top concern, including cyberattacks and employment practices liability, as well as class actions related to cryptocurrencies.
However, P&C insurers are likely to offset potential losses with results from other segments, Fitch asserts. Consider that, in 2019, the ten largest D&O writers held a combined 67% share of all direct statutory premiums, and only 37 individual organizations wrote greater than $10 million of D&O direct premiums, notes Fitch.
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