Increasing need for D&O insurance in Asia

In today’s increasingly litigious business environment, directors and officers face constantly evolving risks and liabilities from regulators and investors, not just in their home market but everywhere the company has operations. Senior leadership are now more likely to have a claim laid against them than ever before. This is becoming a major issue in Asia, where a heightened regulatory environment continues to drive demand for D&O insurance, together with shareholder actions.

Increasing regulation
Regulators in the region have very strong investigative powers and are not afraid to use them. The Hong Kong Securities and Futures Commission has made it clear that it is taking a vigilant approach to supervision and regulation of market participants and listed companies. Other major capital markets and corporate centres are likely to follow suit. Hong Kong and Singapore have historically set the tone for capital markets and corporate governance regulation for the whole of the region. The coming years should see other Asia-Pacific markets adopt a similarly firm enforcement approach.

D&O cover has evolved in Asia to meet this region’s unique needs, including the rising frequency and cost of regulatory investigations. In fact, AIG estimates that up to 90% of D&O claims payments in Asia cover the defence of directors and officers in regulatory proceedings.

Shareholder actions
The region is also likely to see an increase in investor or shareholder actions due to legal reforms. Class action litigation has been introduced in Japan, Korea and most recently Thailand. In fact, the first class action in Thailand has been brought against the operator of a goldmine – the total value of the claim could reach $13m, with a further potential 30% in costs.

The China Securities Regulatory Commission is considering changes to the mainland IPO process. Currently the process requires approval before an IPO, but reform would change this simply to ‘registration’. When this happens, the listing company will take full responsibility for the contents of the prospectus – with the potential for serious consequences if the information provided was subsequently found to be wrong.

Furthermore, there is a new Chinese securities law under discussion, to be published in 2017 or 2018, which is expected to significantly strengthen investor protections. Both of these developments will increase the focus on boards of directors for their oversight responsibilities.

Shareholder suits and class action litigation are currently uncommon phenomena around Asia. This is attributable to a variety of factors, including a developing and fragmented regulatory climate that does not set clear legislation around class action litigation. However, we believe there is an increasing likelihood of shareholder actions throughout corporate Asia.

Claims on the up
The market for D&O insurance continues to grow throughout Asia, evident in the volume of claims paid throughout Asia by AIG. In 2016, more than $13.6m in claims were paid out to holders of D&O insurance, a 47% increase against 2012 figures.

Hong Kong is the region’s most developed market when it comes to D&O insurance, with more than $8m in claims paid in 2016. Other markets are rapidly growing, with a more than eight-fold increases in claims paid since 2012 in Singapore and Thailand, 15-fold increase in Malaysia, and a dramatic 37-fold rise in Korea, against 2012 claims figures.

Taiwan accounts for just over 12% of Asia’s total regional claims paid in 2016, while China represents about 6%, and both countries registered a decline in claims paid since 2012. Nonetheless, both markets, in particular China, are expected to experience continued claims growth as the market for D&O insurance expands.

Chinese expansion
Chinese companies are fast becoming some of the largest multinational conglomerates in the world. In the first three quarters of 2016, Chinese companies spent more than $141bn on foreign acquisitions, predominately in western Europe and the US. But only about 10% of Chinese listed companies in the A share stock exchange have D&O insurance. This is a major corporate governance concern as Chinese companies expand around the world.

Risks and liabilities that did not exist in past years loom large for growing Chinese businesses as they become bigger and, more importantly, geographically broader and more complex enterprises that require sophisticated corporate governance standards. Particularly in western Europe and the US, Chinese companies need to be prepared to manage the costs related to a regulatory investigation or a class action shareholder lawsuit, which are much more common sources of D&O claims than in Asia-Pacific.

Global insurance policies
As Chinese corporations reach scale that may match or exceed global competitors, a broad global policy becomes an increasingly important option for managing unknown liability risks. The nature of liability can change rapidly, and having a corporate presence in multiple countries magnifies this uncertainty. Insurance can help address and mitigate these risks, but a comprehensive solution to risk does not come from a one-size-fits-all approach.

Companies building an overseas presence should carefully consider the governance requirements for each market in which they will operate. Indeed, liability risks arising from potential shareholder actions or regulatory investigations should be a top priority when evaluating M&A targets in overseas markets.

In addition, executing a comprehensive global policy alongside locally admitted policies is becoming a priority to comply with local insurance regulations, to insure the ability to deliver funds for claims in overseas territories. Locally admitted policies may also have enhanced coverage developed over many years to address the unique exposure of that country.

When it comes to buying D&O insurance as part of a global insurance programme, local expertise and operational capabilities should be a key consideration for Chinese corporations of any size as they move ahead with global expansion plans, both organically and through acquisitions.

Contributed by Jason Kelly, head of financial lines for Asia-Pacific at AIG

Previous contributed articles from AIG

Structuring a global D&O programmes

When people are in the firing line

Environmental impairment liability comes of age

Cyber risks and the supply chain