Two years of premium decline in the U.S. directors and officers (D&O) liability insurance line may well run counter to the persistent headwinds present in this segment, according to a new report.

Ratings firm AM Best said the fall in prices may hit insurers with the premium base falling at a time when risks are rising.

The commentary said the corporate D&O segment continues to face multiple risks including those arising from economic uncertainty including artificial intelligence, an evolving legal landscape, changing climate patterns and potentially adverse shifts in public opinion.

The  Commentary, “US D&O Market Liability Premium Declines are Likely Inconsistent with the Risk Environment,” added the subsequent exposure to potential litigation contributed to the skyrocketing renewal premium increases for D&O liability insurers in 2020 and 2021. However, since 2022, new capacity, attracted by the higher rates and elevated account pricing, has entered the market.

“This has led to significant declines in pricing for D&O liability,” said David Blades, associate director, AM Best. “As we near the end of the first quarter for 2025, renewal premium has continued to fall despite some insurers acknowledging that while claims from prior years have developed in alignment with expectations in some cases, in other cases reserves have developed more adversely than anticipated.”

According to the commentary, direct monoline D&O premium written through 30 September 2024, has declined on a year-over-year basis for the past 10 consecutive quarters. Yet improved underwriting performance, tighter contractual language, and more judicious risk selection among D&O monoline insurers has resulted in more favourable direct loss ratios the past few years, even as these premium levels fell. D&O underwriters are still benefiting from the significant rate and price increases and the more conservative underwriting practices that shifted the market’s dynamics during the 2019-2021 period.

“Despite recently favourable statutory underwriting results, the softer pricing of the past couple of years could ultimately dampen the financial performance of D&O insurers because the premium base to support future claims activity has diminished, even as risks are emerging and expanding,” it added.

“We believe that insurer calendar-year results could soon be affected by adverse development embedded in prior accident-year incurred loss and defence and cost containment, or DCC, expense reserves, which is captured in the other liability/claims-made statutory line of business,” said Chris Graham, senior industry research analyst, AM Best.

The commentary explained competitive pressure from new market entrants the past few years underlies the concerns many participants have about the market. According to Woodruff and Sawyer’s D&O Market Update for 2025, most D&O underwriters believe the risks corporate directors and officers face continue to increase. Most underwriters also expressed the belief that companies are not as aware as they should be of the frequency and cost of D&O litigation.