Welcome to Global Insurance Law Connect's first review of international D&O insurance markets. We decided to write this report because of the scarcity of information on how D&O cover, pricing and availability compares across different global markets. In many countries D&O rates are rising, and in some places those increases are extreme, but this is not the case everywhere. In a few markets the green shoots of recovery are showing, as clients reach the limits of what they are prepared to pay, and prices look set to finally stabilise.
There are other tumultuous events impacting D&O too. The global shocks of the pandemic have brought corporate turmoil, fuelling a huge spike in corporate M&A as the weak are bought by the strong, and the well-positioned take advantage of changing markets to expand into new regions through acquisitions. This in itself brings great pressure to bear on directors and officers across the board meanwhile, alongside, many companies are also seeing exposure to new risks brought about by home-working and other pandemic impacts.
Finally, the increase in cyber attacks is driving growth in litigation by those affected, and in many cases the litigant will also name directors and officers within any class action, also increasing the perils for elected company officers. Regulation is a further factor in the mix. Together, this all adds up to an increased need for protection for directors and officers, in a market which lacks capacity to supply it. The impact has been a notable growth in self-insuring for this class of cover, alongside the increased use of letters of indemnity for directors and officers.
In the following pages we have reviewed the global trends highlighted above; while the second half of our report gives you a snapshot of how D&O coverage shapes up country by country. I would like to thank the talented lawyers of Global Insurance Law Connect who have taken time to discuss the complexities of their local D&O market, to analyse trends, and have brought their insight to bear on this report. As always, the specialist expertise of our global group of insurance lawyers sheds light on a complex and challenging topic.
In the majority of countries worldwide, the use of D&O insurance has been increasing for over a decade. The historic roots of this expansion lie in an increasing ability for those with a financial claim against a company to pursue that claim directly against its directors and officers. The concept of personal liability was introduced by the US in the Sarbanes-Oxley Act of 2002, which in itself resulted from the huge Enron corporate scandal – the world's largest company failure of its time.
In the years since 2002, legislators and regulators in many countries have followed the lead of the US in increasing the personal liabilities for company directors and officers. This in itself has brought about an increase in litigation, including a tendency for class action suits to be targeted at individuals as well as the company they work(ed) for.
For many years, D&O insurance was seen as a relatively stable class of cover, and discounting was common. It was popular, and its use also began to grow in countries where it had previously been unknown. Sakate Khaitan of Khaitan Legal Associates in India comments that "Over the last decade, the Indian insurance market has seen liability products like professional indemnity, D&O, cyber protection, etc. become more prevalent. ...The market is borrowing from the western world. As companies are becoming sophisticated, their risk and mitigation strategies need to catch up."
Stiff competition saw premia heavily discounted inevitably, some insurers began to take increasing punishment, as successful (and sometimes very large) claims were paid out.
Justus Könkkölä of Socrates in Finland reflects that: "Historically, the liability risks of D&O had been relatively modest, partly due to cultural reasons and features of the legal structure, such as a lack of opportunity for class actions. The tendency has moved towards a higher duty of care and expanding of liability risks for top management. This is among others because of technical development and cyber risks as well as the increased amount of financial regulation that the corporate entities must now follow."
As a result of all this, dark clouds gathered, and from 2018 onward, stress was obvious in D&O pricing. Wij Advocaten in the Netherlands reports that: "for many years, the Dutch D&O market was considered a soft market. This is no longer the case. In mid-2019 the market started to harden and the pandemic is considered to have been an accelerator further hardening the market."
Some markets took off first, with Australia witnessing a spectacular shortage of capacity and price increases to match in 2019 – as did Spain. However, the misery soon spread, and 2019-2020 became notorious for the increases in cost for D&O premia around the world. In Europe, Robert Byrd of Byrd & Associates in Paris relates that "whilst neighbouring markets such as Italy, Germany and Spain reportedly saw premia increase as early as 2019, the French market escaped this increase in premia until the first quarter of 2020.
The smaller markets of Latin America suffered just as badly as the USA and Europe.
João Marcelo dos Santos of Santos Bevilaqua in Brazil reflects on the many causes that led to this: "Rising D&O claims in the last five years link to corruption charges, environmental damages, administrative liability around securities operations, mergers and acquisitions impacts on tax, labour and anti-competition faults. Particularly in the last year, the trend in claims relates to tax, labour and consumer issues, in addition to financial mismanagement, some of these questions linked with the pandemic situation and its impacts."
Meanwhile in Asia, markets such as China, which were growing, have also seen increased securities-related litigation. Buren's Li Jiao recounts that "As investors' awareness and means of defending their rights continue to increase, the risk of securities-related litigation faced by A-share listed companies has skyrocketed in China." In India, the basis for D&O claims widened exponentially: "The market has seen an increase in "event-driven litigation". Claims which normally were related principally to financial reports can now be driven by product problems, man-made disasters, environmental disasters, corruption, or cyber-attacks."
Prices rose (anecdotally) between 30% and 100% in different territories, and the pandemic brought a global hardening of insurance rates that drove D&O rates up further, along with most other classes of commercial insurance. The pandemic also put further stress on the category itself – see the section below for an exploration of this particular issue.
COVID has been linked to D&O price rises, but, as reported by BLM, "COVID has been an accelerant but not the main cause for the hardening market with rising premiums in the D&O space. The real reason for rising premiums was that there was a gradual appreciation that there was a greater D&O risk in the realms of corporate mismanagement and financial misrepresentation together with a widening exposure of new risks in particular like cyber but also environmental and gender pay/employment issues."
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.