While the D&O insurance market seems to be heading towards normalization, those who are responsible for corporate decisions are increasingly under the lens of the stakeholders and must deal with emerging risks such as the management of ESG issues, cyber, the growth of disputes.
Allianz Global Corporate & Specialty (AGCS) outlines the five major areas of exposure for Directors and Officers in the latest, recently published edition of its annual report dedicated to the segment.
The business support measures launched by many governments during the pandemic are in a phase of gradual withdrawal and this is expected to lead to a normalization of insolvencies in the course of 2022 (+ 15% in 2022, after the -6% forecast in 2021 and -12% in 2020, according to Euler Hermes). The increase will affect all world economies more or less rapidly, starting with the less developed markets. Insolvency is typically a major cause of D&O claims. Specifically, stakeholders may blame administrators for not having been adequately prepared for a pandemic or for prolonged periods of reduced revenues.
Especially for the financial services industry, the risk of market volatility may increase, with the risk of speculative bubbles and inflation rising in different parts of the world. At the same time, exposure to financial risks related to climate change increases and the possibility that banks and insurance companies attribute individual responsibility for the supervision of these risks. Tightening of the regulatory environment, the prospect of climate change litigation or allegations of "greenwashing" could potentially impact executives and directors.
Digitization has undergone a further acceleration following Covid-19, creating greater exposure in the IT and cyber sector. This requires senior management of companies to maintain an active role in leading ICT risk management. Computer disruptions or a cyber attack can cause significant business interruption costs and increased operating expenses due to, for example, customer compensation, consultancy costs, lost revenue and payment of fines, all of which eventualities for which the company management can be held responsible for the lack of adequacy of planning and prevention.
The risk of litigation continues to be a major concern in the D&O arena, particularly with regard to shareholder lawsuits that are increasingly brought in US courts on behalf of foreign companies. These seek to attribute legal and economic responsibility to directors and executives for harmful behavior towards their companies, leveraging the greater openness of US institutions towards this type of litigation.
Another emerging risk in the global D&O insurance market stems from the growth of Special Purpose Acquisition Companies (SPACs), also known as "blank check companies". These companies represent a faster route to access financial markets and while they are growing significantly in the US, they are gaining interest in Asia and to a lesser extent in Europe. The benefits that fuel SPAC growth over traditional Initial Public Offerings (IPOs) include easier procedures, less regulatory and process burdens, easier capital raising and shorter time to complete a merger with target companies.
SPACs involve a number of specific risks that are relevant from a D&O insurance perspective, in particular those of mismanagement, fraud or intentional and material misrepresentation, inaccurate or inadequate financial information, or violations of rules or disclosure duties.
