The COVID-19 pandemic has created a highly volatile and uncertain environment for businesses resulting in a litany of new or heightened risks for directors and officers (D&O) as well as exacerbating the situation in an already strained D&O insurance market, according to a new report by Allianz Global Corporate & Specialty (AGCS). The AGCS’ Directors and Officers Insurance Insights 2021 report outlined rising insolvency exposures, growing cybersecurity threats and persistent securities class action activity are among the key risks for which D&Os of companies could be held liable. The report noted that in 2021, companies also need to be on guard against ‘event-driven litigation’ which can be caused by different triggers such as inaction on diversity, poor sustainability performance or for underestimating or misrepresenting COVID-19 related risks. It showed there has been a growth in the number of lawsuits as well as rising claims frequency and severity has already resulted in a difficult environment for the D&O insurance sector in recent years. The report stated: “Underwriting results have been negative in many markets around the world, including Australia, the UK, the US and parts of Europe. While the market was correcting itself at the beginning of 2020, it was then hit by the current pandemic and economic crisis.” Areas of concern The report stated that the forthcoming insolvency warnings are among the top concerns for the D&O insurance sector as insolvency is a key cause of D&O claims. The report quoted Euler Hermes, a credit insurance company, which announced that the bulk of insolvencies is still to come through the first half of 2021, with its global insolvency index likely to hit a record high for bankruptcies, up 35 percent by end of 2021, and with top increases expected in the US, Brazil, China and core European countries such as UK, Italy, Belgium and France. Companies also face a constantly evolving landscape of cybersecurity threats as ransomware attacks and data breaches continue to be on the rise, while the shift to remote working due to COVID-19 has generally increased security vulnerabilities. “Investors view cyber risk management and adequate security standards as a critical component of a board’s oversight responsibilities,” the report added. Reflecting on class actions, Cornerstone Research stated that collective redress activity, particularly in the US, remains a key risk for any board of management. But new US securities class actions filings were pacing about 18 percent behind rates seen in 2019 during the H1 of 2020, which the report said is largely due to the disruption of business and court activity caused by the pandemic. According to the report, the percentage of new filings in 2020 targeting foreign-domiciled US-listed companies has been almost twice the average in recent years, with around half of these against Asia-domiciled companies including in China and Singapore. In addition, outside the US, securities class actions are being filed in record numbers and the threat of facing an action has increased in many jurisdictions, as highlighted in a recent AGCS and Clyde & Co report. “The landscape for collective redress in Europe has evolved over the last few years and collective action is a growing exposure,” it added. On environmental, social or governance (ESG) and private company issues, it highlighted that beyond financial performance and shareholder value it is increasingly ‘soft’ management topics that trigger so-called ‘event-driven litigation’ against boards: diversity, climate change or ESG concerns are increasingly seen as opportunities to bring class actions or to force a settlement. In addition, climate-change-driven activism and litigation have been on the rise in recent years, too. Cases targeting major carbon-emitting industries have been filed in more than 30 countries, although most cases are filed in the US. The report explained: “While publicly-listed companies are generally more highly exposed to D&O risks, the situation of private companies also is aggravating. The COVID-19 pandemic is currently placing private companies and their executives under considerably higher litigation risk.” Commenting on the report, Shanil Williams, global head of financial lines at AGCS, said: “Many insurers are still digesting the effect of previous pricing inadequacy and exposure and loss trend increases from prior-year policies.” “This is also at a time of great uncertainty around forward-looking exposure assessments, in particular the impact of COVID-19 on the economy in general and on specific industries.” “Combined with many ‘known unknowns’ like climate change, cyber risks or ESG factors, this has created a lot of nervousness in this sector. As a global D&O insurer, AGCS remains committed to working in partnership with our customers to ensure we have sustainable solutions for all parties involved,” he added. Additionally, in October, Captive Insurance Times reflected on the increasing exposures and high claims in recent years as the current market environment is especially challenging for the D&O insurance sector.
