Increase in insurance claims and regulatory enquires
Incidences where executives and directors of businesses are being held liable for their role in issues have escalated and this has led to an increase in claims frequency and severity.
Claims frequency and severity
“This space has changed in a fundamental way, not only has there been a shift to high frequency/high severity claims for damages and judgements, but this is also now coupled with an increase in high frequency/low severity claims for defence costs and regulatory investigations and enquiries,” said Angela Jack, Business Unit Head: Financial Services Group at Aon.
“The claims environment is not dominated by any one industry sector, plaintiff or nature of claim. We have seen everything from local regulatory investigations to international shareholder class actions. There has been an increase in insolvency related claims alleging internal mismanagement all the way through to external audit failure,” added Jack.
“Event driven litigation has become common with both single plaintiff and class action claims. MeToo, Black Lives Matter and COVID-19 are all examples of general macro events that have led to specific claims against companies. We initially anticipated that there may be COVID-19 claims relating to health and safety protocols, and provision of PPE, and whereas these claims have materialised it is the claims for misrepresentation, anti-competitive behaviour and insolvency that are causing the most concern for insurers,” continued Jack.
“There has been a marked increase in the number of claims and regulatory enquiries involving directors and officers. In South Africa, these trends are driven by several factors. These include exceptionally difficult trading conditions, a hyper regulated environment which often comes with personal liability, the undisputed increase in stakeholder activism, new risks like COVID-19 and cyber liability, and finally, a shrinking pool of experienced non-executive directors,” said Teri Solomon, Finpro Practice Leader at Marsh.
2021 D&O insurance market
“The D&O market both locally and globally is exceptionally difficult. Years of underpricing the risk, the increase in frequency and severity of claims, which are at an all-time high, and the historically wide coverage have caused insurers globally to drastically take corrective action,” added Solomon.
“Marked reductions in capacity, broad brush premium increases (sometimes triple digit increases), with little or no risk differentiation, increases deductibles and contraction of wordings have become the norm. The year 2020 was the most severe correction, particularly off the back of COVID-19, and the uncertainty this black swan event may bring. We expect 2021 to remain challenging but early data is suggesting 2021 may be the year of refinement,” continued Solomon.
“For risk managers, their D&O’s and their brokers, it is vital that they understand the market conditions, they start their renewals much earlier, and that they make every effort to present their risk in the best light possible. Given insurers are willing to walk away from risks they don’t like, it is essential for clients to invest time on their D&O renewal and work with the markets. It is also important to manage the board’s expectation that there may well be premium increases and coverage challenges, so it’s best to be prepared for this,” said Solomon.
Jack mentioned that implementation and the ability to evidence implementation of risk management will be key. “This will be wider in scope than previous refences to corporate governance and sustainable and integrated reporting statements within annual reports. Included will be the application of processes and protocols not only for board governance, but also for systemic exposures within a business, including amongst others data protection, employee welfare and safety, financial security, legal and regulatory compliance and operational ability.”
Trends to watch out for
“D&O risk is not going to get easier. To the contrary. Increased liquidations following COVID-19, ongoing event-based litigation, easier access to litigation funding, a massive focus on risk management and risk mitigation, and greater scrutiny of the financial reporting by the board are key trends we expect to see in 2021. Trends to watch out for include the imposition of insolvency exclusions, pandemic exclusions and silent cyber exclusions. It is critical for clients to present their risks in the best light possible, and for their advisers to ensure they are doing everything to negotiate these exclusions away,” emphasised Solomon.
“From a D&O perspective the social media risk is a real one. Elon Musk was recently sued by a Tesla investor, claiming Musk had exposed the company to billions in potential liability and market losses by continuing to send “erratic” tweets. Using social media platforms to influence stakeholders’ dealings with a company can have grave consequences for the board, particularly when this information is relied upon. Social media information which influences share prices is particularly risky, and boards must ensure the appropriate risk disclosures are in place,” added Solomon.
“Social media makes immediate judgements and reputations can be destroyed overnight. On the opposite side of the social medial risk gauntlet is the ability for a person to damage their own or their company reputation by not being cautious about what they themselves post. Inappropriate sexual and racial comments have led to a number of D&O claims over the years. Think before you Tweet,” cautioned Jack.
“Cyber has been a recurring theme over the past few years and remains at the top of the list of trends, it remains top of mind from both a client and insurer perspective. The D&O markets previously had a wait and see attitude toward cyber, going forward we are seeing them actively move to either an affirmative or exclusionary cover stance. Claims that have triggered cyber and D&O policies for data breach losses and for a lack of protocol in force to prevent the breach respectively have created a situation where insurers may be double insuring a loss, and they are looking to restrict this kind of exposure going forward, with either exclusionary clauses on policies, or with tie in of limits clauses, restricting their exposure to the maximum of the highest policy limit,” said Jack.
“EPL (Employment Practices Liability) exposures catered for under D&O policies are falling under increased scrutiny, sexual harassment within the workplace is under increased scrutiny following the Me-Too Movement, whereas the Black Lives Matter campaign has put a spotlight on board composition and diversity,” added Jack.
“Pandemic/Infectious Disease Exclusions are now being considered. It is not just the current COVID-19 situation that insurers are assessing, they are also looking forward to future events and are looking for companies to demonstrate their ability to physically and financially deal with the risks. At present there is a mixture of insurers who are underwriting the risk (assess the information and rate accordingly), and others who are applying blanket exclusionary provisions,” said Jack.
Brokers play an important role
“Brokers should be advising their clients that the D&O market is in an exceptionally difficult cycle and should be managing client’s expectations in this regard. They must prepare for renewal as early as possible, work with their clients to present their risks in the most favorable light and advise their clients to accept that going forward, the underwriting of D&O has changed. It is more intense and is going to require additional information which clients should embrace, rather than avoid,” concluded Solomon.
Photo by C Joyful via unsplash.com article by www.fanews.co.za