Advisen Front Page News
- Wednesday, December 14, 2022
'Gloomy' economic outlook puts D&O insurers on notice: Allianz
Advisen
'Gloomy' economic outlook puts D&O insurers on notice: Allianz
By Erin Ayers, Advisen
Despite a decline in filings, class action securities litigation should stay top of mind for directors and officers and their insurers, as economic uncertainty looms and other risk factors rise, according to Allianz Global Corporate & Specialty’s annual Directors and Officers (D&O) Insurance Insights report.
“The recent decline in the number of filed securities and class actions in the US, coupled with an influx of new entrants, has created a more favorable market for corporate buyers of D&O insurance after double-digit percentage premium increases across key markets in 2021,” said Vanessa Maxwell, AGCS global head of financial lines. “However, 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.
Executives and directors face the potential for claims stemming poor financial performance or insolvencies, cybersecurity issues, and lack of compliance with environmental, social and governance (ESG) regulations. D&O insurers are monitoring inflation, supply chain and energy issues closely as well, according to AGCS – inflation in particular will produce larger settlements.
“From the energy crisis to stock market volatility, it’s a gloomy economic environment,” AGCS said. Underwriters should be expected to analyze firms’ financial strength closely. Economic downturns typically usher in more D&O claims.
Insolvencies are expected to rise by 19% globally in 2023, according to AGCS’ research. The trend is already occurring -- half of the countries analyzed for the report showed double-digit increases in business insolvencies during the first half of 2022, with the small to mid-sized enterprise (SME) sectors in the UK, France, Spain, the Netherlands, Belgium and Switzerland accounting for two-thirds of the rise.
“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,” said David Van den Berghe, global head of financial institutions at AGCS.
AGCS highlighted cybersecurity issues, increased cryptocurrency litigation, and climate change litigation as areas to watch going forward. Cyber is now a core issue for boards, with investors eyeing accountability for data and information security and viewing any failures as breaches of directors’ duties, the insurer said.
Also tying into ESG risks – There have been over 1,200 filings of climate change litigation in the last eight years, compared to just 800 cases between 1986 and 2014. Regulators in Europe and the U.S. have signaled intentions for more reporting and disclosure requirements, which could create non-compliance complaints.
“ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. Those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity,” said Maxwell.
