Buyers of directors and officers (D&O) liability insurance have benefited from strong capacity and healthy competition among insurers to see consistent rate decreases at renewal over the last several years.
Those days may be coming to an end thanks to a growing number of risk complexities within the marketplace–and the past may come back to bite, as well.
Insurance industry rating analysts from AM Best recently said adverse development is embedded in prior-year losses and defense and cost containment (DCC) expense reserves. Therefore, insurers’ premium base to support future claims activity has diminished, AM Best added, and the negative effect on the financial performance of some D&O insurers could soon begin to be seen.
Renewal premium continued to fall during the first quarter of 2025, but AM Best wondered if D&O prices “fell too far, too quickly” from a time about four years ago when new capacity looking for good returns in a high-rate environment entered to create a crowded field of insurers and, eventually, the current soft market.
‘Reduction Fatigue’
For now, brokers agree that a buyers’ market persists but there are signs of a reversal.
In a recent report, Lockton noted that public and private D&O insurance buyers continue to see a stable market, with rates for public companies dropping 9.5% during fourth-quarter 2024.
However, many insurers look to have “reduction fatigue,” according to Lockton.
Some private and nonprofit D&O buyers can similarly still secure rate reductions at renewal, but Lockton warned buyers that insurers have indicated “rates have bottomed out.”
“Where they can, insurers are trying to hold the line on rate to start 2025,” Lockton said.
Woodruff Sawyer late last year said the number of D&O renewals with flat or increased premiums was on the rise for the first time in 18 months. Premium decreases remained prevalent, but the pace of the reductions was slowing.
For 2025, seasoned D&O insurers will “defend their turf,” the broker said.
“Established carriers will work hard to keep rates at what they deem reasonable to avoid the dynamic of underpricing today only to then be forced into hard market pricing or leaving the D&O market altogether,” Woodruff Sawyer added.
Lockton said there is “not as much premium pressure on incumbents in the current market” and that
insurers are more likely to evaluate terms and conditions on an individual risk basis.
Broker Aon concurred, adding that insurers are starting to rethink capacity deployment, and newer carriers in the market are “struggling to gain market share.”
Factors driving the market are plentiful and in flux. To start with some of the more traditional marketplace drivers, the number of securities class action lawsuits in federal and state courts has risen, and the impacts of social inflation and third-party litigation financing continue.
The number of securities class action filings increased for the second consecutive year in 2024, according to a report by Cornerstone Research. The number of “core” filings–those excluding M&A filings–reached 220, 14% higher than the 1997-2023 historical average.
Cornerstone noted that the number of special-purpose acquisition company (SPAC), cryptocurrency, and cybersecurity-related filings fell in 2024 compared to 2023 but artificial intelligence (AI)-related filings more than doubled, including those with allegations of “AI-washing.”
“As a D&O risk, AI is used to provide data and support to corporate decision-makers, leading potentially to questions of the sufficiency of oversight and due diligence,” according to a recent article from broker WTW. “The adequacy and accuracy of investor disclosures relating to the use and scope of AI are also areas of potential risk.”
WTW also highlighted the D&O risk of bankruptcies (among the “most severe” claims, it added) and pointed out a 33% increase in bankruptcy filings through the fiscal year ending September 2024.
Impact of Tariffs
Most recently, tariffs imposed by President Trump on trillions of dollars in imports could impact the D&O line. Stock market volatility, uncertainty, and financial distress to businesses could manifest claims. Shareholders will be paying attention to what companies have to say about the effect on operations and financial results.
“Among the risks is that companies’ strategies and corporate disclosures may later prove to have been ill-founded or inappropriately optimistic and subject to hindsight challenges by aggressive plaintiffs’ lawyers,” said Kevin M. LaCroix, executive vice president, RT ProExec, in his “D&O Diary” blog.
There had been some optimism that better economic conditions would signal a return of initial public offering (IPO) activity–another driver of D&O claims–but companies thinking about it may keep the brakes applied and wait for the market to improve from its dive following the announcement of tariffs.
Continuing the topic of Trump, Lockton said the market remains “cautiously optimistic” that federal regulation and Securities and Exchange Commission (SEC) oversight under the current presidential administration will be more business friendly.
“We don’t know how the change in administration will ultimately impact the D&O landscape, but what we do know is that everything a company does at the board level is increasingly being scrutinized,” said Adam Furmansky, deputy U.S. D&O product leader at Aon, in a recent report. “There are just more opportunities for D&O claims to be filed. It seems that as anything develops in the larger economy, it can lead to a source of claims.”
The SEC’s recoveries from penalties topped $8 billion in fiscal year 2024 despite fewer enforcement actions. President Trump ordered a pause to enforcement of the Foreign Corrupt Practices Act (FCPA).
WTW’s experts said they expect SEC changes to include “rollback of cyber and [environmental, social, and governance] ESG enforcement and disclosure requirements, and an emphasis away from agency-imposed corporate penalties,” but warned against thinking risk will be reduced.
“It is always possible that the reverse may be true–that the lessening of regulatory risk may give rise to a more aggressive plaintiffs’ bar eager to act on purported wrongdoing against which the SEC may be reluctant to act,” WTW said.
Furthermore, changes to views on diversity, equity, and inclusion (DEI) may impact corporate governance and investment risk.
Early on, President Trump signed executive orders to terminate DEI programs within the federal government and within companies or educational institutions that get federal funds. Many high-profile private companies, such as Walmart, Google, Target, Ford, Meta, Amazon, McDonald’s, and Harley-Davidson, have rolled back DEI initiatives.
Lockton said business leaders “face an increasingly complex environment of competing federal and state regulations, as states where Democrats are in power try to blunt the impact of the Trump administration, particularly around hot-button issues such as DEI and ESG investing.”
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