Ratings reports see pricing declines for two P&C coverages

New market entrants over the past year have helped ease price increases for two key property and casualty (P&C) insurance coverage segments in the U.S., according to a pair of recent reports from Fitch Ratings.

Changes in the competitive landscape have impacted pricing for both Directors and Officers (D&O) and cyber coverage. While Canada has experienced some similar pricing shifts, the trends don’t track identically. They do, though, bear consideration since U.S. trends often find their way North.

Here’s what the Fitch reports found.

D&O

Claims uncertainty and a fragile economy, combined with a downward pricing shift, will create revenue pressures and increase loss ratios in 2023 for D&O insurance in the U.S., said Fitch.

Their report said D&O direct written premiums (DWP) would extend 2022’s 9% decline. This will worsen loss ratios in the face of heightened competition that’s reversed pricing momentum and resulted in lower renewal rates.

On the bright side, one key U.S. D&O coverage concern  – aggressive and expensive litigation – is less prevalent in Canada, for the time being.

“Director and Officers’ underwriting volatility is attributable to longer-term increases in litigation activity, defense costs and settlement trends, offset by a pandemic-induced reduction in claims,” the report said.

Fitch noted federal class-action lawsuit filings decreased during the pandemic, and are still 50% below prior peaks. “However, new sources of risk for D&O claims and litigation continually emerge,” the report said.

“A more fragile economic environment and persistently high inflation adds risk to the D&O market, particularly if more bank failures, business insolvencies or a sharp equity market downturn materialize.”

Further, 2022’s pricing slip was partially spurred by competition from several newer market entrants.

“Aon’s D&O market index indicates that primary market pricing is down 5% as of [2022 Q4],” Fitch noted. “This change reverses the trend of improved fundamentals seen from 2018-21 that resulted in a 134% increase in DWP, driven by double-digit premium rate increases and a shift toward more restrictive coverage and underwriting practices.”

Cyber

Cyber is currently the fastest-growing P&C insurance coverage in the U.S.

It’s also the fastest growing product in several Canadian provincial jurisdiction, including B.C. (69% increase in cyber direct premiums written from 2021 to 2022), Quebec (40% increase), Nova Scotia (99% increase), and Newfoundland and Labrador (213% increase), per MSA Research statistics to be published in the forthcoming 2023 Canadian Underwriter Stats Guide.

Still, while year-over-year cyber DPW in the U.S. rose 51% in 2022 to over $7.2 billion, Fitch called for premium rate increases to continue to moderate due to heightened competition and moderating pricing trends.

Fitch said it “expects rates to flatten further, which may lead to a negative shift in pricing trends, similar to current trends in directors and officers liability coverage following a previous sharp rise in rates.”

It added this downward cycle isn’t likely to change unless there’s a resurgence of cyber incidents that cause severe losses.

“Extensive demand for coverage and sharply rising prices have attracted new participants to the cyber market,” the report said. “Market share is becoming more broadly dispersed due to rapid growth by several carriers. The top 10 U.S. cyber writers held 52% market share at [year end] 2022.”

Overall, cyber insurance was roughly 1% of U.S. P&C insurance premiums in 2022, said Fitch.

“Standalone coverage is 70% of cyber insurance premiums, due to heightened policyholder demand for protection and insurer efforts to reduce ambiguity in coverage terms or silent cyber risk,” said Fitch.

“However, cyber renewal premium rate increases are decelerating, with [2022 Q4] rate increases of 15%, down considerably from a record 34% increase in 4Q21, according to The Council of Insurance Agents & Brokers’ commercial P&C market survey.”

Fitch also noted that in 2022 the statutory direct loss plus defense and cost containment ratio for standalone cyber insurance dropped to 43%, versus 68% year-over-year.

“Moderating claims frequency drove underwriting performance improvement, with lower ransomware incident costs and a higher proportion of incidents without payment,” the report said.

“However, this may be temporary, given the rapid pace of technological and economic change, such that recent relative claims stability may prove short lived.”

Feature image by iStock.com/Alexey Yakovenko