D&O rates are likely to continue to soften in Asia in 2025 amid increased competition, ample capacity, and policyholder scrutiny over tighter terms and conditions, says Allianz Comercial in a new report.
The report on risk trends in the directors and officers market, published Thursday (Dec 5), notes that claims frequencies are also down, despite rising bankruptcy filings and AI-related litigation emerging as risk trends globally. But this trend is set to reverse as the market witnesses “historic claims development”, with the number of securities class action filings increasing this year.
Some claims development is set to align with expectations, with other parts developing more adversely than anticipated, said Vanessa Maxwell, Allianz Commercial’s Chief Underwriting officer.
“The D&O market will unlikely see a reversal of pricing trends, but we do expect the [global] rate of price decreases to slow down,” Maxwell added. “We have seen retention or deductibles reduce, but, overall, not to the historic levels seen in the last soft market.”
In Asia, some insureds are reducing limits purchased to save costs, with a reduction in claims frequency and higher claims severity, said Danielle An, Regional Practice Leader, Management Liability Commercial in Asia.
“We have experienced a drop in premium rates overall in Asia during 2024,” An said.
Some segments are experiencing higher reductions than others, like D&O risk with US securities exposure, compared to those without, An added, noting this is being fueled by high competition from an abundance of capacity globally, including London and Bermuda markets competing “very actively” for Asia-domiciled risks.
In 2025, Allianz Commercial expects the market to continue to retract, driven by rate erosion, smaller limits being purchased by customers, and very limited new opportunities given slow capital market activities.
“The soft market is likely to continue, with ample capacity for all risk segments. This will create further pressure on rate adequacy and policy terms and conditions,” An said.
Loss potential still high
While the market has softened, loss potential in the D&O market is still high, as the global rise in insolvencies leaves firms exposed, said Maxwell. “The litigation landscape and enforcement are increasingly stringent, and we are seeing regulatory bodies across the globe step up scrutiny of corporate conduct, making D&Os more vulnerable to investigations, penalties and lawsuits.”
Global business insolvencies for 2024 are expected to increase by 11%, with countries accounting for more than half of global GDP hit by double-digit insolvency increases in 2024, Allianz said in its report.
Asia Pacific markets were second place in number of major insolvencies involving firms with annual turnovers exceeding 50 million euros ($52.97 million), accounting for 67 cases out of 344 insolvency cases in total. China also accounted for five of the 20 largest insolvencies around the world over the first three quarters of 2024, and Chinese markets are likely to see insolvencies increase up to 6% from low levels over the next two years.
Rising insolvencies typically lead to an increase in claims for D&O policies, as creditors try to recover their losses and shareholders sue. And as firms meet higher interest expenses, inflationary pressures and economic headwinds, D&O risk exposures are set to heighten.
“Many companies have faced higher interest expenses, inflationary pressures, and macro and microeconomic headwinds that have impacted their business and resulted in a struggle to service their debt load,” said Dan Holloway, Head of Global Management Liability, Commercial at Allianz.
Medium-sized businesses are the most likely to be affected by the liquidity squeeze globally as they find it harder to access credit and have less margin to weather headwinds.
But these pressures are also likely to contribute to a rising interest in D&O insurance for medium-sized businesses, said Maxwell.
“Given that D&Os of smaller, private companies are closely involved in business decisions, the personal impact of litigation can be significant if they lack insurance protection,” Maxwell added. “In a bankruptcy scenario, executives might be held liable at just the point when the company is unable to indemnify them.”
“AI washing”
Firms that exaggerate their involvement with AI could be accused of “AI washing”, as regulators cast an eye on such claims, Allianz said.
13 AI-related securities class action suits were filed in 2024 alone, with the United States Securities and Exchange Commission (SEC) making at least six enforcement actions against companies who have overstated their capabilities. A class action lawsuit was also filed against Chinese AI and robotics firm Xiao-I, in which shareholders alleged financial reporting issues and that the company overstated its AI capabilities.
Data privacy violations from AI use can also carry high penalties and reputational damage, and AI risk and strategy will need to be a board-level consideration, the report points out. “Boards must understand AI use cases, potential benefits, and set the risk appetite to ensure risk mitigation is in place,” said Dan Holloway, Head of Global Management Liability, Commercial at Allianz.
Compliance oversight will be needed to check for existing obligations on privacy, cybersecurity, discrimination and copyright, and firms will need to have clear reporting lines and metrics, Holloway said.
“While it is important not to overstate AI capabilities, D&Os cannot afford to ignore the opportunities AI present to their business either,” he added. “Being seen as unresponsive could also represent a litigation exposure.”
