Report

D&O 2024 Outlook Summary

Published

20 June 2024

Read time

5 minutes

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Directors' and Officers' insurance 2024 trends

It has been a rollercoaster few years.

There was a dramatic hardening of the market between 2019 and 2021, followed by two years of rates dropping off equally dramatically. In fact, from Q1 2022, the speed at which rates plummeted was the fastest we have seen in the past 20 years.

The rapid rate reductions are, in the short term, very positive for D&O buyers. But whilst buyers appreciate the savings, they don’t like the unpredictability.

There is no doubt that the downwards rate correction was due. Covid had ‘spiked’ rates at a time when the market had already started moving upwards.

The 2019-21 hardening of the market was on the back of a very long soft market cycle and so there was always going to be a marked correction. What exacerbated that though was the collective D&O market concern about what the pandemic was going to bring by way of liabilities for directors and claims. This resulted in a severe reduction in insurer appetite with the willingness to deploy capacity simply dissipating.

In our 2023 report, we talked about the lack of a Covid-related Armageddon moment on the back of the pandemic. The widely anticipated raft of Covid-related D&O claims did not materialise. This ‘released’ pent up insurer appetite and flooded the market with capacity. Insurers were all ‘back in’ and looking to capitalise on the higher rate environment. However, the statistics show that whilst there wasn’t a defining crystallisation of exposure, the after-effects of the pandemic are still definitely being felt.

Key market trends

1

D&O premium rates continue downwards trajectory creating more favourable pricing for buyers

2

The number of US securities class action filings increased for the first time in three years

3

Growing insurer concern that falling premium rates are unsustainable alongside rising cost of D&O losses

4

UK insolvencies at 30-year high, which indicates there will be an increase in claims

We are now seeing signs of the rate decreases slowing and stabilising

In the first quarter of 2024, whilst rates have by and large been continuing their downwards trajectory, our Howden data (below) shows more subdued discounting, a trend that may well continue as the year progresses. But the direction is still downwards.

There is still a lot of capacity not fully deployed, especially given the lack of ‘transactional’ premium from IPOs and M&A that would usually support insurers’ portfolios. The M&A side is however changing, with Q1 2024 showing a 15% increase in Global M&A activity, but it is focused in the Americas and Asia Pacific. EMEA in fact decreased by 10%. (Sharevault, 2nd April 2024).

A soft insurance market is when there is a lot of insurance capacity and rates are low. Conversely, a hard market is when insurance capacity is reduced and premium rates are high.

Source: (Source: Data collected by Howden Financial Lines Group)

Are current rates levels sustainable?

Rate of Line is an insurance metric where the premium expressed as a percentage of the limit. So, if the premium is GBP 100,000 for a GBP 10,000,000 limit, the rate on line is 1%. As premiums differ per policy, rate on line is a useful way of comparing rate per policyholder and expressing how the average base cost of D&O has changed over time.

The question is, of course, whether the current rate level is adequate, or whether the rush to deploy capacity has pushed insurers back into a position where, once the 2021-23 years of account mature, they will again be unprofitable.

An interesting statistic is that at its peak at the end of 2021, Aon’s Quarterly Pricing Index showed the D&O rate as being 2.45. By comparison, 20 years earlier during the last substantial hardening of the market, the rate peak was 2.48. Taking into account the extent to which the risk environment has developed since then and inflation as a whole, one could question whether the market did really harden sufficiently in 2019 to offset the preceding unprofitable years?

When we look at our portfolio data (2016 – 2023), the rate on line shows that at the end of 2023, it was still significantly higher (133%) than it was in 2016. In 2018, it had become clear that insurers were writing unprofitable portfolios and that rates needed a significant adjustment.

Rate of Line is an insurance metric where the premium expressed as a percentage of the limit. So, if the premium is GBP 100,000 for a GBP 10,000,000 limit, the rate on line is 1%.