D&O insurers increasing scrutiny on ESG risk as threats rise

Emerging ESG risks present a growing threat to directors and officers, and their insurers are beginning to factor the issue into underwriting decisions, experts have told Commercial Risk.

With increased ESG scrutiny from shareholders, the public and regulators, insurers are paying more attention to the topic and some D&O carriers are now including ESG risk factors in their underwriting criteria, they explained.

Bruno Dotti, enterprise risk services and ESG practice leader for continental Europe at Marsh, said: “ESG and D&O is a very big topic and we have been discussing it with individual markets a lot. We have a much more consolidated approach in the US, where D&O factors are included in underwriting. For insurers in Europe, it is something they are considering with great attention. Again, we are at the beginning of ESG risk rating. We are in the very first phases of these discussions.”

The broker explained that D&O insurers have different levels of maturity when it comes to ESG. While some have already started to use “tangible instruments” to assess ESG risks throughout the underwriting process, others are only just beginning to consider the topic, he said.

“All of them are clear in mind that – not only for the governance piece of ESG but also for certain industries, social and environmental factors – they will have to totally integrate ESG considerations into their underwriting methodologies. In this context, we are having several conversations with them [insurers] to see how we can integrate our ESG risk rating approach into their underwriting processes,” added Dotti.

Mathieu Borneuf, senior vice-president of professional lines for continental Europe at Sompo International London market/Europe insurance, said insurers are on the “lookout for where they may be exposed to claims but also the potential reputational damage of underwriting companies that are not playing a straight bat in terms of ESG”.

“This isn’t just about the environment, it’s about company culture too,” he said.

“Directors and officers have to be wary of charges brought by employees alleging workplace harassment, sexual harassment or gender discrimination, for example, which could result in negative publicity and reputational damage and a lasting negative impact on the share price,” added Borneuf.

Sarah Crowther, a partner in the global insurance group at law firm DAC Beachcroft, agreed that ESG is a hot topic for insurers and reinsurers. “Cover under D&O policies may extend to ESG exposures, and insurers are likely to become more concerned about interrogating insureds about their ESG propositions and the basis on which disclosures are made and ESG targets set. Insurers may also be interested in the makeup of the shareholder group, keeping an eye out for any renowned activist investors who may be motivated to bring actions against directors,” she said.

Astrid Faber-Wieners, head of underwriting professional lines at HDI Global Specialty, added that D&O underwriters are reacting to the changing risk landscape, with the “entire risk selection process increasingly taking place under ESG aspects”.

A new survey by WTW and Clyde & Co finds that cyber risks dominate the top five risks facing directors and officers. While ESG risks don’t feature in the survey’s top five but are not far behind. Climate change risk was added to the survey for the first time this year and 38% of respondents believe it is a very or extremely significant risk for directors. Some 36% said the risk of becoming the focus of a social media campaign is a big threat.