Overview
In this article we explore:
How recent trends have piqued interest in D&O Liability insurance.
The key underwriting considerations of insurers that organisations need to be aware of.
Actions organisations can take to ensure they’re not left behind in a competitive market.
Increased attention on D&O Liability Insurance
As the risk landscape evolves and presents new hardships for organisations to respond to, we have seen a spike in interest for Directors & Officers' Liability cover. For many companies the challenge has been a delicate balancing act of increased insurance costs, mixed with the right level of protection for the organisation and its directors. However, it’s essential that D&O insurance isn’t just viewed as a tick box exercise, but rather a policy that deserves a spot on the boardroom agenda.
The obligations and responsibilities of directors now extends beyond the traditional boundaries of shareholders and investors, to various stakeholders including consumers, employees and public perception. At Lockton, we have also observed a trend whereby directors are tasked with addressing Environmental, Social and Governance (ESG) matters which can have a significant impact on investor interest and contribution. This is also occurring globally, with many overseas directors responsible for their organisation’s ESG policies and procedures.
Key considerations
The expansive nature of D&O insurance means that the risk profile is always changing. The following are some of the key considerations for insurers when underwriting D&O insurance.
Financial performance: the financial performance of an organisation will always be a cornerstone factor for this type of insurance, with insurers taking note of profit and loss results. Additionally, insurers examine an organisation’s compliance – including debt obligations and covenants, future capital raising plans, and balance sheet strength.
External macro-economic factors: insurers are aware of the macro-economic conditions that can affect companies such as high interest rates, inflation, and the impact these will have on consumer spending. Of course, the degree of impact will differ across industries with some sectors being viewed as higher risk than others. We have already seen multiple cases of hospitality, retail and construction organisations suffer for a variety of reasons including Covid-19, staff shortages, inflation, and supply chain disruptions. Companies operating in these types of industries are likely to receive closer scrutiny by insurers than others.
Environmental responsibility: the move to publicly state environmental goals creates a potential exposure to ‘greenwashing’ claims – allegations that a company has failed to meet its goals or has misrepresented its position. It is expected that greenwashing will be one of the primary sources of ESG claims moving forward. This can be difficult for companies and directors to address as there has not been an agreed global definition of what constitutes ESG and how it should be interpreted. Nonetheless, there is an underlying expectation now from investors, consumers, governments, and the public that directors and officers will ensure their companies are committed to adopting sustainable practices – failure to do so, could result in dissatisfied shareholders. It is also worth noting that environmental expectations are not only placed on company directors, but insurers are under scrutiny too, with many moving away from risks associated with environmentally harmful activities, such as fossil fuel projects, which creates increased pressure on the market.
Modern slavery movement: the proposed modern slavery legislation in New Zealand will apply to all business entities from sole traders to state sector organisations to charities and incorporated societies. Whilst there will be a graduated set of requirements, dependent on revenue brackets, organisations will be obliged to take actions to combat modern slavery. The regime will also have specific offences that will be met with monetary penalties for disclosure or due diligence failures (likely to be between NZD 600,000 to NZD 5million). Furthermore, directors would be held personally liable for such breaches, which will not only cause financial damage but reputational harm – therefore, creating further risk to a company and director’s profile.
Culture and conduct: negative reports in mainstream and social media raise doubts in the minds of insurers as they question if such matters could lead to potential claims. Insurers are keen to understand the relationship between a company’s board and its executive management team, and the broader culture of the company. Another stream that has a lot of focus, is an Organisation’s diversity and inclusion policies, staff benefits, and learning and development opportunities, such as training and upskilling. Insurers are interested in learning about the experience and diversity of the board itself such as the length of time a person has been a director, their skill set and experience, and its relevance to the board.
Cyber security: an already challenging class of insurance, but from a D&O perspective, insurers need to be able to determine a company’s cyber security governance and maturity. Directors have fiduciary duties to the company and its shareholders. Failure to implement and monitor necessary cyber security and data protection systems, and ensure strict protocols, could result in allegations that a director has breached their duty. This is becoming increasingly challenging for companies and directors to address, as the premiums and deductibles for cyber insurance continue to rise.
Looking ahead
In 2022, most organisations have experienced moderate D&O premium increases following the sharp correction in premium rates, policy deductibles, and reductions in limits experienced in recent years. For those organisations operating in high risk or distressed industries, high premium uplifts have remained.
Whilst no new insurers are operating in New Zealand in this space, there has been a return of competition into the London market particularly where excess layer insurance is purchased. However, the flow on effect of this into the New Zealand landscape is yet to be fully seen. We would encourage directors to remain engaged in the process when their D&O insurance renews, and to be aware of any new clauses imposed which seek to restrict or reduce cover. After all, this insurance is there to protect their personal liability as a director.