Board members and company executives can be held liable for an increasing range of scenarios. Today’s market volatility, with the increased threat of asset bubbles and inflation, the prospect of a growing number of insolvencies due to the pandemic environment, together with rising scrutiny around the environmental, social and governance (ESG) performance of companies and the urgency for robust cyber resilience are key risks for directors and officers (D&O) to watch in 2022.
Risk managers and their D&O insurers should also closely monitor potential exposures to US derivative actions and other forms of litigation, while also not underestimating the challenges around increasingly popular SPACs (special purpose acquisition companies), according to the latest edition of Allianz Global Corporate & Specialty’s (AGCS) annual D&O report.
“The actions and culture of organisations and their directors and officers are coming under heightened scrutiny from a wide range of stakeholders, with litigation risk a primary concern,” said Shanil Williams, global head of financial lines at AGCS. “This comes against the backdrop of a stabilising D&O marketplace, although capacity is still tight in some segments and many companies would like to buy more limits than the industry can offer. The market remediation has advanced and this will gradually ease the pressure that some of our clients are facing. We are adopting a cautious and disciplined underwriting approach and need to remain wary about the current volatile business environment and closely monitor loss trend patterns. However, the D&O insurance space is slowly, but surely, offering opportunities for profitable growth again in selected pockets – and we are eager to pursue these.”
The withdrawal of support measures for companies established during the pandemic sets the stage for a gradual normalisation of business insolvencies in 2022 The Euler Hermes Global Insolvency Index is likely to post a +15% y/y rebound in 2022, after two consecutive years of decline (-6% forecast in 2021 and -12% in 2020). While the wave of insolvencies has so far been milder than anticipated, mixed trends are expected across the world. In less-developed markets, such as Africa, the number of insolvencies is expected to increase faster compared to more developed economies, where the impact of the governmental support is expected to last for longer.
Traditionally, insolvency is a major cause of D&O claims as insolvency practitioners look to recoup losses from directors. There are many ways that stakeholders could go after directors following insolvency, such as alleging that boards failed to prepare adequately for a pandemic or for prolonged periods of reduced income.
The financial services industry, but also companies from other sectors, continue to face multiple risk management challenges in the current economic climate. Markets are likely to become more volatile, with the increased risk of asset bubbles and inflation rising in different parts of the world. At the same time, more banks and insurers are expected to assign individual responsibility for overseeing financial risks arising from climate change, while investors are paying closer attention to the adequate and timely disclosure of the risk that it poses for the company or financial instrument they invest in. The tightening regulatory environment, the prospect of climate change litigation or ‘greenwashing’ allegations could all potentially impact D&Os.
Meanwhile, digitalisation has further accelerated following Covid-19, creating enhanced cyber and IT security exposures for companies. This requires firms’ senior management to maintain an active role in steering the ICT (information and communication technologies) risk management framework.
“IT outages and service disruptions or cyberattacks could bring significant business interruption costs and increased operating expenses from a variety of causes including customer redress, consultancy costs, loss of income and regulatory fines. Last, but not least, brand reputation can also suffer. All this can ultimately impact a company’s stock price, with management being held responsible for the level of preparedness,” said head of financial lines for South Africa and France, Pauline Vacher.