D&O rates followed frequency boon, ignored severity time-bombs: AM Best
US D&O claims and reserves could easily derail the fragile segment profitability as social inflation, litigation funding, and broadened underwriting terms overwhelm a softened rate environment, analysts at AM Best are warning.
“In light of the fall in rates due to an influx of capacity and a decline in IPOs, AM Best is sceptical about rate adequacy and how reserves on claims from prior accident years will develop,” AM Best analysts said in their latest segment report.
Loss ratios in US D&O have fallen, putting the industry on track in 2023 for its best loss ratio in nine years, data through end-Q3 had suggested.
The cause: a rapid decline in securities class action litigation that came hand in hand with a drop-off deal counts.
The six-year track record of improving loss ratios has drawn plenty of new rate-supressing capacity into the market, while the dearth of deal-flow has further supressed premium levels.
That frequency gain papers over a rising severity threat from social inflation, litigation funding and jury trends, likely marching at an undiminished pace. Generative AI could supercharge plaintiff activity, AM Best also suggested. Continued evolution in regulatory demands has not made matters any easier.
The upshot: “concerns that pricing may have swung too quickly” from the market hardening that ran strong through points in 2021 and have since dwindled to zero. Carriers have flooded the zone, creating a “highly competitive market in which supply outweighs demand.”
Such price dynamics couldn't handle a rekindling of deals and litigation and could make the whole book of current and prior business fall behind threats from social inflation, AM Best warned.
“In light of the impact of economic inflation, social inflation, and litigation funding on the ultimate disposition of these cases, D&O insurers’ prior accident year reserve development could become adverse.”
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