Better underwriting results in the U.S. directors & officers (D&O) liability line “will likely add downward pressure on rates amid decreased demand in the segment”, according to a new AM Best Special Report.

Direct premium on a monoline basis in the D&O liability segment declined for the second straight year in 2023, according to the Best’s Special Report.

Underwriting performance in the segment has been favorable for three years straight, with last year’s direct loss ratio of 50.8 its best level in a decade.

“Following more than 10 years of soft market conditions, which left most monoline D&O risks underpriced, the significant increase in pricing from 2020 and 2021 in particular led to a notable decline in the direct loss ratio,” said David Blades, associate director, AM Best.

Strategic underwriting practices on current D&O liability risks suggest the loss ratio may continue to decline over the near term, the report added.

In recent years, the report noted underwriters have largely steered clear of offering high limits per individual risk commonplace during the 2010s and that factored heavily into the adverse loss severity trends of the past decade.

Rising settlement and litigation costs, growing exposures from new technologies, and the expectation that prices will continue to fall in 2024 could counter some of the positives and contribute to AM Best’s current negative outlook for the U.S. D&O liability segment.

“Broadened contract terms and the growth of social inflation, litigation funding, legal advertising and risk exposures for corporate D&O could negatively affect calendar year results,” the report outlined.

Excess and surplus lines writers benefited from hard market conditions in 2020/2021, resulting in a larger share of D&O liability business being written on a non-admitted basis and led to favorable calendar-year results.

Disclosure requirements related to potential casualty catastrophe exposures such as cyber, emerging risks such as PFAS, or climate-related litigation could lead to an increase in lawsuits for corporate D&O and worsen loss severity, the Am Best report added.