In the dark orange zone: preparing for the new normal
Directors and officers (D&O) cover arrived in India much after the notorious Bhopal Gas Tragedy of 1984. Union Carbide's pesticide plant in the city of Bhopal had an accidental leakage of the deadly methyl isocyanate (MIC), leaving thousands of people dead.
The liability class of solutions was generally missing from the market at that time -- not even simple offerings like public or product liability were available. Fast forward to 2009, when Satyam Computers' owner confessed to altering accounts. The company, which also had an American Depositary Receipt listing on the NYSE, fortunately did have D&O cover -- unlike Union Carbide back in 1984. Ironically, while the overseas investors could bring about a class action against Satyam, Indian investors had no such recourse, given the absence of such a law.
The Indian Companies Act 2013 finally addressed this anomaly. Apart from providing for class action, it not only formalised the concept of independent directors but, among other things, also made the role of auditors more onerous. Despite the growing complexity, the pricing of D&O has eroded dramatically -- reducing it to a commoditised product. It is not that there are no claims. The low premiums also mean lower brokerage and a higher frequency of claims, leading to increased servicing demands. As a result, some brokers have stopped promoting this product.
Given that the two largest portfolios in the Indian insurance pie are auto and health, the miniscule D&O market is nowhere on the radar. At the top most general insurers' current wishlist is the hope that post-Covid-19, the old normal will return. That auto will be back in the race to resume its 60% contribution to overall gross written premiums. Likewise, mortal fear of the virus will significantly grow the health book. However, whether the old normal returns or not, what lies in store with the new normal?
In this regard, D&O certainly merits long overdue attention.
- For directors and officers looking with trepidation at a post-Covid-19 world, the following factors deserve consideration:
Bankruptcy: The micro, small and medium-sized enterprises segment in the supply chain looks most vulnerable. Cashflows are severely impacted. Working capital is scarce and credit risk has escalated. Labour-intensive businesses will face a serious shortage of workforce. A large section, being migrant in nature, has fled the industrial and urban centres and may not return. Automation will take time and cost money.
- Employment practices liability (EPL): Working from home (WFH) saves the effort of commuting but the demands in terms of time can be unreasonable. Employees are working longer hours and on weekends, too. They are struggling with a work-life balance. Performance management processes must be mindful of this new reality. Once back at work, many employees will have to deal with a new level of scrutiny by a private surveillance system. Fertile ground for employment-related triggers.
- Technology -- virtues and vices: Multiple external plugins thanks to WFH would compromise even the most-secure networks -- an ideal playground for hacking, breach of confidentiality, data losses et al. Tracking employees with tech and using it as a compliance tool could create a digital panopticon.
- Independents: WFH and virtual board meetings will distance independent directors most from the 'shop floor'. As the regulatory and compliance gaps grow and potential challenges such as EPL or cyber trigger, their role will become more onerous. They must consider augmenting 'Side A' of their protection. Needless to say, shareholders may be unhappy with a virtual AGM, which might be more of an orchestrated event. The Ministry of Corporate Affairs has allowed this for now, but there would be trouble for sure if this were to become an ongoing practice.
- Business interruption: Clients are waking up to the merits of well-thought-out coverages that include the implications of pandemics. Wimbledon and the University of Chicago (Urbana Champagne) stand out. Not only do boards and risk committees become answerable, so do brokers.
- Restarting operations: Leaking vapour from styrene monomer storage reportedly cost at least 11 lives and resulted in the evacuation of thousands last week at LG Polymers in Vizag, as it tried restarting after the lockdown. This highlights a challenge that most hazardous industries will need to navigate with due care and caution. Risk management practices will be under the spotlight if things go wrong.
All of these red flags need to be viewed in a holistic sense. D&O, professional indemnity, cyber, business interruption and a host of other coverages can apply, depending on the nature of business. But D&O sits at the top of the value chain -- the buck stops at the board. The new 'orange-flag' reality brought upon us by the coronavirus is here to stay. For directors and officers, it appears to be a darker shade.
Will Covid-19 bring a much-awaited trigger for class action? There have been several near-misses in the recent past -- Coal India, Nestle, Infosys amd ICICI Bank, to name a prominent few. Time will tell. However, it is surely high time to take D&O seriously.
Praveen Gupta FCII is a Chartered Insurer and former CEO