D&O 'reset' faces headwinds

Broker Marsh has flagged risks – both existing and emerging – that could affect the “reset” that is now underway in the directors’ and officers’ (D&O) insurance market.

Companies must remain on guard against traditional dangers such as reckless trading and fraud but they also have to watch out for threats that are starting to affect their risk profile like ethical trade, racial equity and gender equality.

“We believe the potential impacts of these emerging risks and the likely severity of their consequences should drive a new level of inquiry by each director and officer,” the report says.

The objective is to ensure they understand a deeper level of likely claims scenarios from both a frequency and severity perspective; the likely legal impacts including defence and summary costs; and how their D&O insurance will respond including limit of liability, defence and allocation.

“Allegations of wrongful acts by directors or officers are the key drivers of claims, so having a deeper understanding of their proximate cause and likely consequences is essential,” the report says.

“Unfortunately, the overall claims landscape in New Zealand continues to evolve with a number of high-profile cases, as well as hundreds of less notable claims, often driven by regulators and other professional and/or licensing bodies or agencies.”

Even an economic slowdown – which economists have predicted is likely – could also affect an insured’s D&O risk profile as claims typically surge during a downturn, the report says, citing data in the aftermath of the 2008-2009 global financial crisis.

The report says a Marsh UK study in 2016 found D&O claims between 2005 and 2015 increased by 75% during the financial crisis, peaking in 2012.

“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,” Marsh New Zealand Chief Client Officer Steve Walsh said.

He says 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,” he said.

The report, produced in partnership with the Institute of Directors in New Zealand, says there are now signs of a market “reset” from offshore with new market forces and changes after five years of significant disruption.

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.

About 89.5% of organisations in New Zealand provided directors with liability insurance, according to the institute’s 2022 directors’ fees report. The figure is up 4.4% from the previous year.