Increases in insolvencies, cyber-attacks and litigation named as top threats for D&Os

The pandemic has created a highly volatile and uncertain environment for businesses resulting in new or heightened risks for directors and officers (D&O), according to a report from Allianz Global Corporate & Specialty (AGCS).

The business stated that its Directors and Officers Insurance Insights 2021 report had also shown that Covid-19 is exacerbating the situation in an already strained D&O insurance market.

According to AGCS, rising insolvency exposures, growing cyber security threats and persistent securities class action activity are among the key risks for which D&Os of companies could be held liable.

Triggers
It predicted 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.

AGCS explained that a rise in the number of lawsuits along with an increase in claims has resulted in a difficult environment in recent years, with many markets, including the UK, seeing negative underwriting results.

Shanil Williams, global head of financial lines at AGCS, commented: “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.”

He continued: “Combined with many ‘known unknowns’ like climate change, cyber risks or environmental, social or governance (ESG) factors, this has created a lot of nervousness in this sector.”

Insolvencies
According to AGCS, forthcoming insolvency warnings are among the top concerns for the D&O insurance market. It pointed out that insolvency is a key cause of D&O claims as administrators usually look to recover losses from directors.

It added that Euler Hermes had predicted 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% by end of 2021.

It noted that top increases were expected in the UK, Italy, Belgium and France, as well as in the US, Brazil and China.

“The impact of the gradual phasing out of temporary policy measures designed to support companies is one of the key concerns for 2021,” said David Van den Berghe, global head of financial institutions at AGCS.

The provider added that companies are also facing a constantly evolving landscape of cyber security threats.

Litigation
In addition, disruption to business and court activity caused by the pandemic are also key risks in the D&O sector.

“Another threat looming on the horizon comes from the return to office steps taken by businesses,” warned Williams.

“Such decisions are fraught with peril, with regard to shareholder derivative actions, but also in relation to other forms of litigation stemming from employees or customers.”

AGCS detailed that, beyond financial performance and shareholder value, management topics that trigger so called “event-driven litigation” against boards include diversity, climate change or ESG [environmental, social and corporate governance] concerns.

Risks
Joana Moniz, global head of commercial financial lines at AGCS, said: “Social justice protests, activist investor campaigns or money laundering schemes could all develop into litigation trends, as could single catastrophic events such as a plane crash or the California wildfires.”

According to AGCS, the pandemic is currently placing private companies and their executives under higher litigation risk.

Moniz concluded: “Generally, D&Os of privately-held companies are more closely involved in all of the company’s operational topics and business decisions. This can more easily translate into being held personally liable through different forms of litigation.”

For all the latest industry news direct to your inbox, sign up for our daily newsletter.