These 5 issues will rock D&O insurance during 2022
Insolvency is among the issues to watch as governments start pulling back pandemic-driven support measures.
Potential asset bubbles, inflation, pandemic-induced bankruptcies, increasingly litigious environments, growing regulatory scrutiny are some of the challenges conglomerating to increase the range of risks faced by boards and company executives today, according to Allianz Global Corporate & Specialty (AGCS).
“The actions and culture of organizations and their directors and officers are coming under heightened scrutiny from a wide range of stakeholders, with litigation risk a primary concern,” Shanil Williams, global head of financial lines at AGCS, said in a release.
Although capacity is tight in some segments, and many companies would like to buy limits beyond what insurers can offer, the overall D&O market is stabilizing, according to Williams, who added the D&O sector is “slowly, but surely, offering opportunities for profitable growth again in selected pockets — and we are eager to pursue these.”
Projecting what to expect in the coming year, AGCS highlighted the following five trends as ones to watch in 2022:
1. Insolvency issues continue to be top of mind: With governments around the world ending business support measures established during the pandemic, a more normalized rate of insolvency is expected to return. Although the rate of bankruptcies has been less than initially anticipated, global markets are expected to see varying levels of businesses failing. Emerging markets such as Africa and Latin America are expected to see faster insolvency rates than more developed nations such as Germany and the U.S., where government support is expected to last longer, according to AGCS.
A spike in insolvency could lead to a wave of lawsuits, such as allegations that a board failed to prepare adequately for the pandemic.
2. Market volatility: Growing risks around asset bubbles and continuing inflation are expected to propel further market uncertainties in the year ahead. Additionally, banks and insurers alike are anticipated to assign individual responsibility for risks driven by climate change, while investors are paying more attention to these types of matters.
With regulatory oversight expected to increase, particularly for environmental issues, the chance of climate change litigation and the prospect of “greenwashing” claims could impact D&O policies.
3. Cyber interruptions, reputational harm: As businesses across industries further embraced digital processes during the pandemic, the exposure surface for cyberattacks grew. This makes it imperative that company leaders have an active role in shaping an organization’s information and communication technologies risk management framework.
“IT outages and service disruptions or cyber-attacks 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,” Joseph Caruso, regional head of financial institutions for North America at AGCS, said in a release. “All this can ultimately impact a company’s stock price with management being held responsible for the level of preparedness.”
4. Heightened litigation risks: Lawsuits continue to be a top D&O concern as litigation is increasingly being brought on behalf of foreign companies in U.S. courts, according to AGCS.
“A number of new lawsuit filings, the recent openness of certain courts to extending long-arm jurisdiction and a possibly record-breaking settlement announced in October 2021 point to heightened U.S. litigation risk for directors and officers of non-US domiciled companies,” David Ackerman, global claims key case management at AGCS, said in a release.
At hand are lower financial barriers to filing suits in the U.S., where courts and juries are also considered more plaintiff friendly, according to AGCS.
5. SPAC scrutiny: Special purpose acquisition companies (SPACs), or “blank check companies” as they are colloquially known, offer a faster track to launching an initial public offering. SPACs are also a major emerging risk for the global D&O sector.
“Exposures could potentially stem from mismanagement, fraud or intentional and material misrepresentation, inaccurate or inadequate financial information or violations of rules or disclosure duties,” David Van den Berghe, global head of financial institutions at AGCS, said in a release.
During the first half of this year, SPAC mergers in the U.S. more than doubled what was seen during 2020, raising a combined $95 billion. While the European regulatory environment is considered less business friendly than in the U.S., the SPACs trend is anticipated to cross over to Europe as well as gain favor in Asian countries.
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