U.S. professional liability market to remain robust in 2017, with competitive level for D&O and E&O businesses remaining heightened: A.M. Best

The professional liability sector of the United States property and casualty insurance market will continue to be robust in 2017, with the competitive level for directors and officers (D&O) and errors and omissions (E&O) businesses specifically remaining heightened, A.M. Best Company said in a new report.

The Oldwick, N.J.-based ratings firm released their A.M. Best special report Fertile Ground for Growth Amid Escalating Competitive Challenges on Friday. Although the U.S. professional liability sector remained dynamic through the end of 2016, “as key coverages continue to be impacted by more-than-ample market capacity and the competitive pressure that capacity is placing on rates and contract terms and conditions,” A.M. Best said in a press release.

The special report noted that in recent years, midsize and larger multinational primary insurers and reinsurers have looked to develop or grow their professional liability portfolios – which include D&O liability, E&O coverage and employment practices liability (EPLI) business, along with cyber liability coverage – as part of an overall strategy for top-line growth. “Due to the medium- to long-term nature of the lines of coverage involved, the success or lack thereof of these insurers will not be known for some time, particularly as loss frequency and severity trends shift over time,” the release said.

Over the last several years, D&O and EPLI premium growths have been attributable in large part to rate increases from 2011 through 2013; however, beginning in first quarter of 2014, the influx of additional competitors in the professional liability market space has slowly but steadily driven rates downward, A.M. Best reported.

“In addition, the E&O marketplace is still trying to get its arms around the impact of large data and privacy-related losses afflicting the retail and health sectors, along with other technology losses that have breached the six-figure threshold,” the release said. “Some insurers have decided to steer clear or even withdraw from competing on business in the retail, health and financial institution sectors where the exposure to cyber risk is substantial.”

Overall, A.M. Best predicts the professional liability market will continue to be robust in 2017, with competitive levels for D&O and E&O businesses specifically heightened. D&O insurers with growth initiatives can be expected to focus on adding value to their offerings through the utilization of coverage enhancements, the ratings firm said. If merger and acquisition activity spikes upward in 2017, that could lead to pressure on D&O pricing and coverage terms since M&A activity can yield an increase in claims. Likewise, major cyberattacks impacting businesses and implicating board oversight, also could elevate the challenges for D&O insurers to generate profits.

For E&O carriers, effective underwriting and rate adequacy will be of paramount importance those that stay active in the market considering the challenging risk profiles of companies with large data/privacy exposures. As well, some insurers may need to tighten coverage terms, increase deductibles or step away from accounts that have poor loss experience in order to meet profitability goals going forward, the release concluded.