Allianz outlines trends, challenges for D&O insurance in 2024

Cynthia Ezekwe

In the current post-pandemic landscape, directors and officers (D&O) insurers are facing a number of emerging risks that could have a significant impact on the market in 2024, it has emerged.

Analysts observed that the gloomy outlook for the D&O space is due to a variety of factors, including an economic downturn, a rise in cyber-related risks, and an increase in shareholder activism. These trends have the potential to increase the cost and complexity of D&O insurance, and could also lead to a decrease in capacity.

According to Allianz Commercial, a leading insurer for mid-sized businesses, large enterprises, and specialist risks, there are several key risk trends that D&Os need to be aware of in 2024. These include inflation and refinancing pressures, geopolitical uncertainty, and environmental, social, and governance (ESG) issues.

The ongoing inflationary environment is putting pressure on companies to manage costs, and refinancing risks are rising as interest rates continue to increase. Geopolitical events, such as the ongoing Russia-Ukraine war, have also created a volatile and uncertain business environment. 

Meanwhile, increased scrutiny of ESG performance has led to increased regulatory and litigation risk for companies. The report notes that directors and officers need to be prepared for these challenges and take steps to manage their risks accordingly.

The report also highlights the need for directors and officers to have a comprehensive risk management strategy in place, including insurance coverage that is tailored to their specific needs.

“Board members and company executives can be held liable for an increasing number of scenarios. Inadequate responses to economic pressures, geopolitical issues, implementing innovative technologies such as GenAI, or environmental, social, and governance (ESG) challenges are among the main factors driving the possibility that a company and its Directors and Officers (D&Os) may be sued in 2024,’’ the report noted.

According to the report, the main challenge facing D&Os in 2024 is to be prepared to adapt and respond to the various headwinds facing businesses. This includes having a plan in place to make cuts where necessary, but also to have a broader strategy that allows the business to adapt and respond to changes. The report notes that a “nimble” business is one that is able to pivot and respond to challenges without compromising on its long-term goals. This requires a high level of planning and foresight, as well as the ability to make tough decisions when necessary.

The report points out that the post-pandemic period has been a challenging time for many businesses, as inflationary pressures have been high around the world. Companies are also facing the challenge of refinancing existing debt, which has become more difficult after years of low interest rates. This is causing pressure for companies to make difficult decisions, such as cutting costs or finding new sources of financing.

The Allianz trend also predicts that business insolvencies will rise by 10 percent in 2024, on top of the increases seen in the past two years.

“Directors and Officers are seeing fresh pressure on cash generation. Decisions around how the company finances capital expenditure (Capex) and manages its debt profiles are under more scrutiny from stakeholders. Directors and Officers must choose between new debt at higher rates, discussions with shareholders on equity raises and, in some cases, easing of Capex in the business,’’ the report pointed out.

The report further  highlights that D&Os are facing increased pressure and scrutiny in the wake of geopolitical conflicts and supply chain disruptions. The ongoing conflict in Ukraine, as well as the recent outbreak of hostilities between Israel and Hamas, are shining a spotlight on the safety of employees and the need for adequate insurance coverage. The report poses questions about the suitability of kidnap and ransom policies, and whether companies are prepared for business interruptions that may occur as a result of such conflicts.

The report also points out that directors and officers face increasing regulatory and legal risks related to environmental, social, and governance (ESG) issues. Governments and regulators are introducing new requirements for companies to report on their ESG practices, and companies that fail to meet these requirements may face legal action. This is a complex and evolving area, and directors and officers need to be aware of the potential risks and ensure they have the appropriate policies in place.

“The number of countries introducing ESG-reporting mandates has grown considerably in recent years, exposing directors to costs of responding to investigations, enforcement actions, and potential fines and penalties, for suspected non-disclosure or misrepresentation. Such requirements also expose directors to claims by private litigants, not only for alleged misrepresentation but also due to dissatisfaction with what the required disclosures reveal about a company’s commitments to ESG issues,’’ the report explained.

David Ackerman, who heads global financial lines claims at Allianz, commented on the increasing importance of ESG-related issues for companies. He noted that the political and social polarisation of the world is creating new challenges for directors, who are now expected to consider the impact of ESG factors on corporate value.

According to the report, the power of social media to influence public opinion and behaviour is a significant risk for companies, as evidenced by the example of Silicon Valley Bank. When rumours about the bank’s health began to spread on social media, it led to a sudden withdrawal of funds and ultimately a bank run that caused the bank to fail. This highlights the importance of having effective risk management strategies in place to address the potential risks posed by social media. The report notes that companies need to be aware of the power of social media and be prepared to act quickly in the event of a crisis.

The report also explored the potential risks associated with the use of artificial intelligence (AI), specifically generative AI (GenAI). It noted that, while AI has the potential to bring many benefits to organisations, there are also a number of risks that need to be considered. These include cybersecurity threats, increased regulatory scrutiny, and investor expectations that may not be realistic.

“Litigation recently filed against AI companies, OpenAI, Microsoft and Google, has already highlighted some risks related to privacy and/or copyright law violations11. These cases, along with the items noted above, have the potential to bring securities claims, intellectual property claims, breach of fiduciary duty claims, misrepresentation claims, and shareholder and derivative lawsuits. As investors increasingly demand transparency and data about how companies are utilising and investing in GenAI, the onus will be on the leaders of organisations to thoroughly understand the technology and its appropriate use case for their businesses,’’it added. 

According to Hannah Tindal, one of the regional heads of commercial D&O at Allianz, while the potential benefits of AI are exciting, there are also a number of challenges to consider. One of the most significant risks is the threat of cyber attacks, which can be even more damaging when AI is involved. In addition, increased regulation is likely as AI becomes more common, and companies will need to be transparent about their use of the technology.

“Organisations can mitigate the risks associated with GenAI technologies by setting up best practices and deploying agile methods to keep governance, compliance protocols and legal frameworks current and able to adapt to the technology as it evolves. Close monitoring of AI’s evolution should be a high priority on the boardroom agenda,’’ Tindal advised. 

The report noted that organisations can mitigate the risks associated with GenAI by setting up best practices and developing agile methods to keep their governance, compliance protocols, and legal frameworks up to date and adaptable as the technology evolves. This includes having a clear policy in place for the use of AI, ensuring that data is protected and used responsibly, and establishing a governance structure to oversee the use of AI.

In response to the top risk trends highlighted in the report, Vanessa Maxwell, the global head of financial lines at Allianz Commercial, emphasised the importance of preparedness for these challenges. She noted that the rising trend of insolvencies, geopolitical uncertainty, and increased cyber risk all pose significant threats to businesses. Additionally, she pointed out that environmental, social, and governance (ESG) claims are becoming more common and can be particularly difficult to manage. Maxwell suggested that having a diverse boardroom can help organisations approach these challenges in different ways and find innovative solutions.