AIG’s North American results for the fourth quarter of 2018 included $362mn unfavourable development, pre-adverse development cover (ADC), stemming from the carrier’s US financial lines business, primarily directors and officers (D&O) lines.
That figure makes up the bulk of $445mn pre-ADC unfavourable development AIG reported for the quarter, pre-ADC.
This data point from AIG fits with the more anecdotal observations from other industry participants around US D&O insurance in recent weeks - that pricing has been inadequate to support the level of losses in the line, creating signs of problems for some carriers in the space.
AIG’s D&O-driven unfavourable development was mostly due to primary D&O facilities, employment practice liability insurance (mostly in the private not-for-profit sector), as well as excess D&O, said CFO Mark Lyons on a call with investors Thursday.
Lyons said that the reserve strengthening in the company’s US financial lines book primarily centered on the 2016 and 2017 accident years.
“More importantly, the issues in these years stem from an influx of securities class action claims, mostly impacting our primary D&O operations in those same two accident years,” he said on the call.
“The frequency in these claims reduced in our books from 2016 to 2017 and more dramatically so from 2017 to 2018, reflecting a concerted underwriting effort to reduce writing primary IPOs and primary life science and health care risks,” Lyons added.
While catastrophes impacted the segment less than in the previous year, the high adverse development notched up the combined ratio to 125.3 percent.
While AIG is a major player in the D&O market, its recent woes are not unique to the company. At the recent PLUS D&O Symposium in New York, industry experts discussed how the US D&O claims environment has increased in frequency and severity, outpacing rates for the better part of a decade.
Securities class action lawsuits have spiked significantly in the past two years. In a recent post on his D&O Diary blog, RT ProExec executive vice president Kevin LaCroix said there were 403 federal securities class actions in 2018, and 412 in 2017. From 1999 to 2016, the average annual number of filings was 193.
This heightened level of litigation has put pressure on the D&O market’s profitability.
On a call with investors on 29 January, WR Berkley president and CEO Rob Berkley also addressed the impact of more-frequent and severe D&O claims on his business.
Berkley said he believed the marketplace would begin to have “a meaningful response” to what he described as “an extended period of significant competition and the eroding of market conditions.”
“There has been incremental pain here and there for the marketplace,” Berkley said.
“I think it is starting to accelerate,” he said. “It is, in my opinion, clearly a line that one needs to be very careful [with] right now…things need to improve considerably before one could open up the spigot.”