D & O insurance: tackling increasing risks for directors

Now is the time for businesses to reset how they think about D&O insurance, according to a report released today by the Institute of Directors (IoD) and Marsh NZ.

The report ‘D&O insurance: Hitting the reset button’ reveals that after five years of significant disruption, there are now signs of a market reset from offshore with new market forces and changes coming our way.

“However, D&O insurance is not a proxy for governance and an increasingly important part of the due diligence that insurers undertake includes understanding organisations’ governance structures and processes,” says Institute of Directors’ Guy Beatson, General Manager, Governance Leadership Centre.

The pandemic and economic instability triggered a premium uplift in the D&O insurance market, but a recent trend shows insurers are becoming more flexible and pricing has started to stabilise. This comes as welcome news for directors.

Previously, the insurer's focus was on the quality of the risks they underwrite, which was based largely on the financial performance of the entity seeking cover. But today, there is an increasing emphasis on the risk profile of the directors, officers and overall governance of the respective entities.

Beatson says D&O conversations need to be led by the board so they are aware of what the policy entails including company structure, coverage of directors, limits, trends in litigation and settlements in their industry sector, and confidentiality and non-disclosure requirements.

“Directors are facing new and changing challenges, risks, legislation, and stakeholder expectations. Each year the percentage of organisations surveyed by the IoD with D&O insurance is increasing, with a corresponding decrease in the percentage of directors who are wary about taking on governance roles due to increased personal liability,” Beatson says.

The IoD’s 2022/23 Directors’ Fees report found that 89.5 percent of organisations provided directors with liability insurance. While that percentage is high the question might be, is it enough?

The business community is faced with an ever-changing legislative environment, more active regulators, ESG, an increasing focus on organisations’ social licence to operate and increasing demands from customers. The report reinforced the importance for insurers, directors and officers to understand that the risk landscape is changing, at pace.

Steve Walsh, Chief Client Officer of Marsh NZ says “the insurance market will be impacted by the impending economic downturn as well as emerging risks such as social disruption, climate and environment, social and governance (ESG) risks, and cyber breaches”.

A surge of D&O claims is also predicted as we move into a period of economic downturn.

A Marsh UK study (2016) between 2005 and 2015 found D&O claims increased by 75% during the Global Financial Crisis, peaking in 2012.  A steady increase was seen over a two year period (between 2005 and 2007) with an average number of annual claims rising from 200 to 300. And claims totalling 1,685 in 2012.

Back home, the overall claims landscape in New Zealand continues to evolve.

“The key focus areas for all insurers will be culture and conduct, ESG and business continuity. Profiling the culture and conduct of the business provides an insight as to how a company operates in areas such as people, gender equality, diversity and inclusion practices, and health and safety record,” says Walsh.

While it might be tempting to leave the placement of D&O insurance to management, now with directors facing greater liability for the decisions they make at the table, the need for cover becomes critical.

But, buyer beware. Not all D&O policies are created equally, and boards will need to be prudent and ensure their D&O covers are appropriately tailored to their particular risks.

Beatson and Walsh both commented that the D&O landscape is settling down to more effectively help directors manage uncertainty and risk – D&O has been ‘reset’, but the extent and nature of the risks directors, boards and their organisations are managing are becoming increasingly complex.