D&O cover complexities testing market as it seeks stability

Insurers say the risk environment for directors and officers (D&O) cover is becoming ever more complex, which is creating a demand for not only coverage but greater risk management.

Specialist insurer RSA recently launched a new D&O product targeting UK companies with a turnover in excess of £250m. Following that news, the firm’s head of financial risks Matt Houghton told Insurance Times that directors were facing new challenges.

“It feels like there’s currently a lot more uncertainty in the world and whenever there’s uncertainty, that in itself brings an element of risk around the decisions we make,” he explained.

“At the moment, there are a lot of challenges for people who run companies, a difficult economic environment, increased regulatory and shareholder oversight, heightened international tensions, increased cyber threats and we still have a hangover from Brexit affecting UK companies.

“Looking forward, we have emerging risks such as ESG and artificial intelligence (AI), alongside the recent change of government. Directors certainly have a lot to think about.”

The range of risks that directors and officers now face are also continuing to grow, according to market experts. However, Jamie Thompson, director of financial lines at QBE Europe, said the market was now reaching a degree of stability.

He explained: “We saw a sharp increase in rates in 2018 when there was limited capacity, [but] since [then] we have seen capacity enter the market and rates start to soften. That capacity was welcome because clients need choice. Currently we are seeing stability come into the market.

“The issue for the D&O market is the length of the tail. It can take a long time for claims trends to become apparent.”

AI and ESG

Two of the more prominent risks that have recently increased in relevance to the D&O sector are AI and concerns around the impact of ESG.

For example, Vanessa Maxwell, global head of financial lines at Allianz Commercial, told Insurance Times: “There, is a lot of risk facing D&Os and their insurers. Inflation continues to bite, influencing future claims through larger settlement values and greater defence costs. The higher cost of refinancing debt is proving a shock.

“Insolvencies are rising, geopolitical uncertainty is considerable, cyber risk is elevated and ESG claims are here to stay – and proving challenging.

Thompson added: ”D&Os need to be prepared for these headwinds and have a strategy that can adapt when presented with a block to the business. Diversity in the boardroom allows companies to have varied approaches to such problems.

“Macro and political issues continue to concern directors and officers. We have the upcoming US election and a new government in the UK, which will always create uncertainty.”

“There are always emerging risks, but if we can deliver certainty for clients then we are in a good place.”

Regulatory action or litigation risks due to ESG-related issues are major concern for boards, driven by increasing reporting and disclosure requirements that threaten to trigger claims in case of an inadequate response or non-compliance.

Allianz added that the number of countries introducing ESG-reporting mandates has grown considerably in recent years, exposing directors to costs in responding to investigations, enforcement actions and potential fines and penalties for suspected non-disclosure or misrepresentation.

Houghton added that while ESG concerns were ’undoubtedly a risk’, it was still too early to forecast the full impact of what this growing form of compliance would entail.

“There are always emerging risks, but if we can deliver certainty for clients then we are in a good place.”

He explained: “The environmental part of ESG tends to take up the majority of the focus and claims could come from a number of scenarios, such as shareholders believing the company is moving too slowly, being too optimistic in regulatory disclosures, implementing changes badly or being accused of greenwashing.

”In the US, some states are even enacting anti-ESG legislation – so it’s certainly a challenge to navigate.

“ESG isn’t just about being environmentally compliant though – issues such as supply chain and modern slavery are also factors. There is so much that fits under the ESG banner.”

No clear path

In assisting clients with navigating through this constantly changing line of cover, there is not always agreement in the approach to take. 

David Ackerman, head of global financial lines claims at Allianz Commercial, for example, said: ”“Not every stakeholder holds the same view on an issue or the same view as to what actions directors should take.

“The governance part of ESG is becoming increasingly important. Directors have to understand their complete supply chain.”

“In a world that is becoming increasingly polarised – both politically and socially – the very need for directors to evaluate and address the impact of various ESG factors on corporate value creates risk that claims will be made by activist shareholders or other motivated stakeholders, [be that] on either or both sides of any given issue.”

For example, Urvi Patel, senior D&O underwriter at QBE, noted that the governance aspect of ESG was becoming more and more vital to understand for brokers in this sector.

She explained: “The governance part of ESG is becoming increasingly important. Directors have to understand their complete supply chain. If they are a retailer which sources their goods for a third party, they need to ensure they are not breaching modern slavery rules, for example. They have to have an understanding of the whole supply chain however complex.”

Thompson added: “The market that directors and officers operate in is becoming more complex, but we are aware of it, and we look to manage it. We speak with our clients to examine their risks and provide feedback on the trends and emerging risks we are seeing.

“The market is split at present. There are those who are driven by price and are happy to engage with the newer entrants and there are those who are keen to work with insurers who have been through the cycle and can help with risk management of both today’s and future risks.”