A changing D&O environment in EMEA: More volatility ahead?
External factors are expected to be the driving force for D&O claims. We believe four topics will have an influence on the D&O claims landscape in Europe, the Middle East and Africa (EMEA).
In the world of D&O insurance, inflation can be broadly divided into two categories.
Economic inflation occurs when prices of goods and services are rising while the purchasing power is decreasing. Today inflation has tripled or quadrupled in most countries, with the annual inflation rate in the eurozone estimated at 9.2% (source: Eurostat).
Soaring inflation could put some companies into financial trouble, potentially leading to an increased rate of insolvencies. Insolvencies are commonly known as one of the most frequent drivers of D&O claims. High rates of inflation mean that unless income increases at the same rate, people are financially worse off. This can lead to lower levels of consumer spending and a fall in sales for companies, especially companies focusing on non-essential products and services. While companies could remain relatively unaffected by inflation through transferring all costs to consumers, in reality some companies will absorb part, if not the majority, of the increased cost to avoid losing customers.
Litigation funding has grown in the EMEA region and is a popular tool for plaintiffs taking on large companies that have vast amounts of funds and insurance to defend claims. Stakeholders are putting pressure on companies to meet high corporate social responsibility standards and are increasingly holding them responsible to such standards. This growing sentiment will likely lead to an increase in claims related to diversity, human rights violations, antitrust and climate change.
The combination of economic and social inflation will likely lead to claims inflation. Since both economic and social inflation are increasing, we can expect that D&O insurers will feel a double effect on the claims cost. This may be mitigated by the fact that investment income could increase in lieu of higher interest rates, but it is unlikely to increase enough to offset any claims inflation. In addition to this, the number of D&O claims we see has increased during the past ten years.
- Supply chain disruptions
Blocked transportation routes, labour shortages and soaring energy prices are all contributing to disruption. The ultimate effect for companies could be loss of revenue and increased costs, thus impacting on already constrained liquidity positions. Some companies are moving away from a ‘Just in Time’ inventory model approach by greater stockpiling inventory. This change in approach can put pressure on working capital needs and liquidity which, in combination with the effects of increasing inflation and the appetite of lenders, could lead to more financial pressure for companies. Corporate decision makers are being forced to quickly adapt and react to disruptions and changes in the supply chain, exposing them to potentially questionable decision making. The situation is a tough test for the decision-making governance within companies.
- Increased regulatory and criminal enforcement activity
We have seen regulators and criminal enforcement authorities in EMEA being more active in pursuing companies for alleged wrongdoings. In addition to this, it is expected that the active US regulators will increase their cross-border collaboration with non-US regulators and enforcement agencies as part of an initiative under the Biden Administration. We have already seen companies in EMEA be subject to criminal enforcement investigations where multiple regulators from different countries collaborate, sometimes with follow-on shareholder actions brought in one or multiple markets.
Furthermore, the European Commission has put forward a proposal for a directive on Corporate Sustainability Due Diligence to tackle human rights and environmental impacts across global value chains. If this directive comes into effect, it will set a standard for EU companies on certain minimum requirements and harmonise the rules across member states. It will help make sure that companies will be held liable if they fail to prevent or mitigate potential adverse impacts on human rights and the environment, not only in their own operations but also within their suppliers.
- EU Collective Redress Directive (see footnote 1)
According to the EU, the intention of the directive is to protect consumers being harmed by unlawful practices. Under the directive, so called “qualified entities”, such as consumer organisations and public bodies, may bring representative lawsuits on behalf of consumers against companies for violations of different EU laws – e.g. relating to general consumer laws, data privacy, energy, financial services, telecommunications, travel and tourism, and environment and health.
The new EU Consumer Redress Directive may lead to heightened awareness and activity around consumer class action litigation in Europe.
In combination with existing and evolving risks such as inflation, supply chain disruption and regulatory investigations, directors and officers at companies in EMEA are likely to have more responsibility on their shoulders than ever before.
- Directive n° 2020/1828 25 November 2020
*This article is an extract from AIG’s report: A changing D&O Environment in EMEA: More Volatility Ahead?, published in 2022.