Bad news events and climate change have D&O risk implications

Bad news events, the impact of climate change, bankruptcies and political challenges have increasing risk implications for directors and officers (D&Os), according to a new report from insurer Allianz Global Corporate & Specialty (AGCS), titled Directors and Officers Insurance Insights 2020.

The report highlights five mega trends which will have significant risk implications for senior management in 2020 and beyond. It also examines some of the factors that are driving recent changes in the D&O insurance market after a period of sustained large loss activity.

“AGCS continues to see more claims against D&Os emanating from ‘bad news’ events not necessarily related to financial results,” says Shanil Williams, global head of financial lines at AGCS. “Scenarios include product problems, man-made disasters, environmental disasters, corruption and cyber-attacks.”

These types of event-driven cases often result in significant securities or derivative claims from shareholders after the bad news causes a fall in share price or a regulatory investigation.

The report also states that failure to disclose climate change risks will increasingly result in litigation in future. Environmental, social and governance (ESG) failings can cause brand values to plummet.

“Directors will be held responsible for how ESG issues and climate change are addressed at a corporate level,” said Williams. “Increasingly, they will have to consider the impact of these when looking at strategy, governance, risk management and financial reporting.”

Securities class actions are growing globally as legal environments evolve, according to the report. AGCS has seen increasing receptivity of governments around the world to collective redress and class actions, particularly across Europe but also in other territories such as Thailand and Saudi Arabia.

AGCS expects to see increased insolvencies which may potentially translate into D&O claims. Business insolvencies rose in 2018 by more than 10 percent year-on-year, owing to a sharp surge of over 60 percent in China.

All of these mega trends are further fuelled by litigation funding now becoming a global investment class, attracting investors hurt by years of low interest rates searching for higher returns.

Although it is estimated around US $15bn worth of premiums are collected annually for D&O insurance, the profitability of the sector has been challenged in recent years due to increasing competition, growth in the number of lawsuits and rising claims frequency and severity. AGCS has seen double digit growth in the number of claims it has received over the past five years.

Insurers are facing more legal costs due to increasing activity, as well as more settlements and claims. Another issue is that “event-driven” litigation results in aggregation issues where multiple policies may be triggered. One event could trigger both D&O and either aviation, environmental, construction, product recall or cyber insurance policy claims, for example.

“D&O insurance addresses the intrinsic strategic risks of corporations and their senior management, and over the past year the D&O market has seen major change and likely will experience further volatility in 2020,” said Williams. “One of the best defences to protect against such volatility is for risk managers and their D&Os to maintain an open dialogue with underwriters and brokers, so that all parties can gain a better understanding of the risk culture and governance within an organization.”

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