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.
It will be available at our website www.fitchratings.com.