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Cyber risks, consolidation pose challenges for directors and officers insurers

Cyber risks, consolidation pose challenges for directors and officers insurers

Cyber-related risks present a growing exposure for insurers providing directors and officers liability coverage, Fitch Ratings Inc. said Wednesday.

“D&O-related exposures from cyber events arise through allegations that ineffective or negligent corporate governance and board oversight were contributing factors behind inadequate systems defenses and a breach that led to losses and/or a sharp decline in share value,” the Chicago-based rating agency said in “U.S. Directors and Officers Liability Insurance 2016: Recent M&A Activity Boosts Market Concentration.”

“Results are still pending as to whether recent, more severe cyber events lead to significant D&O settlements,” Fitch said. “However, expansion in the number of cyber incidents will create more potential for cyber-related D&O actions going forward.”

The report noted that the D&O liability marketplace underwent consolidation last year, with three of the largest D&O underwriters involved in acquisitions, including the creation of Chubb Ltd. when Ace Ltd. acquired Chubb Corp.

According to Fitch's analysis of pro forma 2015 statutory filings, the largest D&O insurers are American International Group Inc. with 16.7% of industry premiums; Chubb, 14.4%; and XL Catlin, 10.2.%

“While there is potential for more consolidation through merger activity in the D&O market, in the near term, more renewal business may be in play as recent acquirers focus on integration efforts and underwriting portfolio optimization,” Fitch said.

“At the same time, other competitors are searching for growth opportunities by hiring displaced underwriting talent or acquiring new distribution sources and accounts with parties that desire new relationships outside of newly merged entities,” according to the analysis.

Fitch also said although D&O insurance pricing fared better than many other commercial lines in recent years, “past profitability and strong underwriting capacity promote flat to deteriorating D&O rates that are anticipated to foster less favorable underwriting results going forward.”

It also said competition is more pronounced in excess coverage relative to primary layers due to a greater number of active underwriters.

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