AGCS highlights key risk trends for D&O insurance market in 2023

By Olivia Nnorom

A poor financial performance amid economic uncertainty, concerns of a global recession,lack of a robust robust cyber security, inadequate response to environmental, and social and governance (ESG) issues have been identified among the key risk trends in the Directors and Officers (D&O) insurance space, according to Allianz Global Corporate & Specialty (AGCS).

The leading global corporate insurance carrier, in a recent assessment of  the D&O insurance ecosystem, found that though the sector has seen a favorable shift for buyers, inflation and current risk environment means the potential for more frequent and severe losses remains.

It further noted that the impact of macroeconomic risks such as inflation and insolvency and their impact on D&O insurance  are the main factors driving the possibility that a company and its board of directors may be sued by investors or other stakeholder groups in 2023

Commenting on the report, Vanessa Maxwell, Global head of financial lines at AGCS, noted that there is still a lot of risk facing insurers as macroeconomic issues and a potential slowdown loom, conditions which typically lead to an uptick in D&O claims.

“Inflation is likely to influence future claims through larger settlements. Cyber risk remains at an elevated level and is now seen as a core duty of D&Os, with increasing scrutiny on how they respond.

Meanwhile, ESG-related liabilities, whether it is inadequate action on climate change or diversity and inclusion issues,can potentially become significant exposures for D&O insurance as well,” said Maxwell.

From the energy crisis to stock market volatility, the world economy is in a gloomy economic condition.  For many countries, the economic outlook for 2023 is doom-laden with recession risk rising.

As a result, plunging growth rates, surging inflation, the energy crisis, continuing stock market volatility and ongoing supply chain issues are monitored closely by D&O underwriters as they have been projected to cause liquidity and profitability squeezes in many sectors and fuel rising insolvencies.

“More than ever, D&O underwriters are focused on the financial strength of a company, particularly around liquidity.  With global economic uncertainties progressing,

Half of the countries analyzed by Allianz Research recorded double-digit increases in business insolvencies during the first half of 2022, with the SME sectors in the UK, France, Spain, the Netherlands, Belgium and Switzerland accounting for two thirds of the rise.

Overall, insolvencies are expected to increase by 19 per cent in 2023 globally., with the economic downturn typically bringing a higher risk of D&O claims, the report said.

David Van den Berghe, Global head of financial institutions at AGCS, emphasised that the likelihood that a public company will be sued in a securities class action increases when financial performance is poor, a company’s share price drops or there is a risk of bankruptcy.

“In such scenarios, investors may argue that the company failed to disclose the challenges it was facing to maintain its earnings guidance, driving a potential increase in D&O claims,” he added.

According to the AGCS Directors and Officers Insurance Insights 2023 report, issues such as data security and information protection are now core areas to watch for directors.

The report further noted that investors increasingly view cyber security risk management as a critical component of a company’s board risk oversight responsibilities. As fiduciaries, board members are therefore expected to develop and maintain accountabilities for IT security before, during and after any cyber incident as alleged failures can be seen as a breach of duty.

Shedding more light on this, Rishi Baviskar, Global cyber experts leader at AGCS’ Risk Consulting team, disclosed that around the world, directors have already been called to account, including in derivative and direct litigation, due to their alleged failures to institute appropriate governance and protection against cyber security risk.

Baviskar added that major breaches experienced by publicly traded firms have damaged investor confidence, causing share price drops, and thereby becoming ‘events’, which again can give rise to costly class action securities litigation.

“Boards therefore need to initiate and implement a cyber risk management structure that covers the entire organisation,” he advised.

Regulatory action or litigation risks due to ESG-related issues were identified as another major concern for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance, according to the report.

In addition, companies and their boards also face the prospect of increasing litigation from environmental or climate groups, activist investors or even their own employees.

“Climate change litigation is increasing, with over 1,200 cases filed internationally in the last eight years, compared with just over 800 cases between 1986 and 2014. Most of these were filed in the US, but there are increasing filings at international courts or tribunals: 2021 saw the highest annual number of recorded cases outside the US,” the report noted.

Another risk outlined is misrepresenting ESG credentials or achievements, also known as ‘greenwashing’,which can also lead to regulatory action, litigation, and shareholder suits.

Vanessa Maxwell noted that ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. He added that those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity.

Another trend assessed by the report is the increasing targeting of cryptocurrency companies and exchanges for litigation. The report showed that there were 10 lawsuits filed against cryptocurrency players in the first half of 2022 alone, compared to 11 for the whole of 2021, 13 in 2020 and only four in 2019.

AGCS said the increased litigation may not be surprising given the recent volatility of cryptocurrency valuation and the November 2022 crumble of FTX, the world’s second-largest crypto exchange.

“Authorities across the globe are investigating potential violations of securities laws, and oversight has increased,” AGCS said.