Liz Booth reports on a golden opportunity for insurers and brokers to promote the value of D&O cover
In the past couple of years, insurance rates for directors’ and officers’ (D&O) cover have been on the rise – much to the chagrin of risk managers and corporate officers who have been experiencing sharply increased costs.
Now, rates are reported to be stabilising and there appears to be a new opportunity for insurers and brokers to press home the real need for D&O cover at a time when claims against directors and officers are also increasing fast.
It seems senior managers and c-suite members are recognising those risks as well. A new survey from broker McGill and Partners has found that 84% of board directors view a regulatory investigation as their biggest personal risk, while board directors also believe an investigation to be a significant risk on a company level.
The McGill report detailing the survey findings suggests recent actions taken by global regulators and increased scrutiny on individuals could be fuelling fears.
Regulatory investigations, the report states, whether for bribery or corruption, fraud, accounting irregularities, cyber issues or whistleblower claims, can result in substantial fines. These can be punitive, running into the hundreds of millions of dollars and, depending on the nature of the wrongdoing, could also result in criminal proceedings.
McGill points, for example, to the global aerospace company Airbus, which in 2021 agreed to pay €991m (£835m) to the Serious Fraud Office (SFO) following a bribery investigation. The payment comprised a fine, disgorgement of profits and costs. This was on top of agreements with other regulators across the world, resulting in an overall global settlement of €3.6bn (£3bn). Defence costs for such proceedings can also be significant.
According to a recent claims report from insurer AIG, defence costs per director for a typical SFO prosecution have doubled in recent years and can be as much as £4m per director. While a D&O insurance policy will typically cover these costs, this would not be the case if the director admits wrongdoing or is proven guilty.
Noona Barlow, partner/head of financial lines claims at McGill and Partners, says: “It’s vital that directors understand what their D&O policy covers. All too often, they simply aren’t aware, and can find themselves personally liable and facing significant costs. While directors may expect their company to protect them in case of regulatory investigation, the company’s interest may no longer align with its current or former directors and therefore access to the D&O policy is vitally important.”
Increased threat
A report from Allianz Global Corporate and Specialty (AGCS) echoes this message. It warns: “Board members and company executives can be held liable for an increasing range of scenarios. Today’s market volatility, with the increased threat of asset bubbles and inflation, the prospect of a growing number of insolvencies due to the pandemic environment, together with rising scrutiny around the environmental, social and governance (ESG) performance of companies and the urgent need for robust cyber resilience, are key risks to watch in 2022.” Risk managers and their D&O insurers should also closely monitor potential exposures to US derivative actions and other forms of litigation, while also not underestimating the challenges around increasingly popular special purpose acquisition companies (SPACs), according to the latest edition of AGCS’s annual D&O report.
The actions and culture of organisations and their directors and officers are coming under heightened scrutiny from a wide range of stakeholders, with litigation risk a primary concern, according to the AGCS report.
Shanil Williams, global head of financial lines at AGCS, says: “This comes against the backdrop of a stabilising D&O marketplace, although capacity is still tight in some segments and many companies would like to buy more limits than the industry can offer. The market remediation has advanced, including our own portfolio at AGCS, and this will gradually ease the pressure that some of our clients are facing.
“We are adopting a cautious and disciplined underwriting approach, and need to remain wary about the current volatile business environment and closely monitor loss trend patterns. However, the D&O insurance space is slowly but surely offering opportunities for profitable growth again in selected pockets – and we are eager to pursue these.”
Gradual normalisation
The withdrawal of support measures for companies established during the pandemic sets the stage for a gradual normalisation of business insolvencies in 2022. While the wave of insolvencies has so far been milder than anticipated, mixed trends are expected across the world.
In less developed markets, such as Africa or Latin America, the number of insolvencies is expected to increase faster compared to more developed economies, such as France, Germany and the US, where the impact of the governmental support is expected to last for longer. Traditionally, insolvency is a major cause of D&O claims as insolvency practitioners look to recoup losses from directors.
Digitalisation has further accelerated following Covid-19, creating enhanced cyber and IT security exposures for companies, adds the AGCS report. “IT outages and service disruptions or cyberattacks could bring significant business interruption costs and increased operating expenses from a variety of causes, including customer redress, consultancy costs, loss of income and regulatory fines. All this can ultimately impact a company’s stock price, with management being held responsible for the level of preparedness,” warns Williams.
Liz Booth is contributing editor of The Journal
