AM Best Issues Warning: D&O Insurance Market Faces Tightening as Reserve Deficiencies Emerge

America's most closely watched insurance rating agency, AM Best, has raised yellow flags over the directors and officers liability insurance sector in a new market analysis, warning that a market long defined by robust profitability is showing measurable signs of stress. The report marks an important shift in the D&O narrative: after years of buyers enjoying competitive pricing, abundant capacity, and declining premiums, the tide may be beginning to turn.

The numbers tell a nuanced story. Direct premiums written by monoline D&O insurers peaked at nearly $15 billion in 2021 before falling to just over $10 billion in 2025 — a 33% decline driven by intense competition, abundant new market entrants, and a sharp drop in securities class action lawsuit filings as initial public offering and SPAC activity slowed materially. Underwriting results remained profitable through this period, with loss ratios staying relatively contained. However, AM Best's latest analysis identifies two concerning trends: the direct incurred loss ratio for monoline D&O jumped more than five percentage points in 2025 alone to 54.5% from 49.0%, and adverse reserve development has emerged in accident years 2023 and 2024, suggesting that prior-year reserves may have been set too optimistically.

David Blades, associate director at AM Best, described these as warning signs that could indicate an 'underlying deficiency' potentially leading to deteriorating underwriting results over the near term. Christopher Graham, a senior AM Best analyst, noted the competitive D&O marketplace is expected to become 'a little tighter in 2026, with underwriting margins likely to shrink.'

Beyond the reserve dynamics, AM Best flagged several emerging risk categories reshaping the D&O landscape. AI-related securities litigation is becoming a growing concern as boards grapple with investor expectations around AI use disclosures and governance oversight failures. Geopolitical instability — particularly from the ongoing Iran conflict — is creating new liability exposures for corporate directors whose companies operate in or near affected regions. Cybersecurity board-level oversight continues to be a source of shareholder litigation following high-profile incidents. The average settlement cost in US securities class actions rose 27% in the first half of 2025 to $56 million, according to Allianz Commercial's D&O report, and that trend is expected to continue into 2026.