Insight

D&O 2024 Outlook

Published

21 June 2024

Read time

4 minutes

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Directors and Officers insurance 2024 trends

It has been a rollercoaster few years in the D&O insurance market.

In recent months the D&O insurance market has been grappling with high levels of competition driven by under-utilised capacity. This is at a point in time where the macro-economic environment is not particularly positive and claims trends could well mirror that.

The competition is good news for D&O buyers as rates continue their downwards trend, but there must be a question as to when will it reach the new base rate and will that be sustainable?

The claims environment continues to pose challenges for insurers. 2023 saw an increase in US securities class actions for the first time in three years. The size of US securities claims settlements also rose and inflation continued to fan the flames of claims costs.

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 a 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 on 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 - and how will that affect future premium pricing?

Rate on 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%.