Revisiting D&O: a re-emerging risk? – Rémy Massol, ACE

In recent years, it has often been individual directors on the receiving end of investigations and legal proceedings. But it’s not just the financial sector that has been affected, of course. Post-crisis, a range of plaintiffs are becoming quicker than ever to blame company directors for their perceived sins-particularly against a backdrop of suspicion around ‘big business’ in some quarters. And, as a range of companies in different industries have shed workers in an attempt to cut costs, litigation brought by former employees seems more visible.

D&O now business as usual?

Many companies, who have probably spent years dedicating attention to new legislation and to good corporate governance practice, may now feel they have ‘done their due diligence’ and D&O has moved from covering an emerging risk to ‘business as usual’.

hide

Insurance is often one of the core means of protection available but, with the economic and regulatory outlook as challenging as any we’ve seen lately, taking a commoditised approach may be inadvisable. Given changing liabilities post-crisis, now could be a good time to review insurance arrangements and check that these are keeping pace.

Indeed, when we researched over 600 European companies last year, fewer than half said they feel adequately prepared for dealing with D&O risk today. And a thirds of companies’ boards said they had not discussed D&O insurance or exposures in the previous 12 months.

Viewing D&O through a multinational lens

Perhaps the most interesting finding from our research is the increasingly multinational angle to D&O risk. We specifically asked managers which risk areas they feel their multinational operations are most exposed to. Tellingly, D&O was the number one answer, emerging well ahead of terrorism and environmental risk-those supposedly higher profile areas.

Many European companies are successfully growing their exports in order to bear the economic gloom closer to home. Indeed, every business seems to be targeting emerging market expansion. This is all positive stuff, but unless companies large and small get a handle on the risks involved in building their overseas operations, the costs could outweigh the benefits.

More and more, as European companies go overseas for growth, their directors are finding themselves more exposed in less familiar markets. In particular, the potential for culpability to reach beyond a director’s or officer’s own actions to those of others is increasingly under the spotlight. Allegations reported against US-headquartered Walmart, for example, focused on whether its managers in Mexico made ‘improper payments’ to secure the company’s presence in the country and have led to accusations of a ‘cover up’ implicating the company’s own Board of Directors.

The growing role of global programmes

While multinational insurance programmes have become more commonplace for more general property and casualty risks, companies have tended to purchase one global insurance policy to cover their more ’emerging’ worldwide exposures. D&O often falls into this second bucket. However, in today’s increasingly proactive and complex global compliance environment, regulators are more likely to take action against individuals. With overseas expansion and more exacting governance arrangements, there are often more non-executive directors on boards and more subsidiaries to consider.

As good corporate governance becomes an increasingly important factor in a wide variety of countries, we find that more and more questions are asked about how D&O programmes work and, in particular, what would happen if the policy was triggered by a local loss. In many cases, additional local policies are having to be issued and larger limits are being requested.

In addition, the growing likelihood of D&O claims being incurred outside a company’s home goes hand in hand with globalisation. As foreign direct investments have been increasing over the past years, more and more companies are generating a significant proportion of their turnover in overseas locations.

The sheer size of some of the foreign subsidiaries that are formed as a consequence of these moves abroad make them a large exposure that cannot be either insured from a single policy issued for the home office, nor from a local policy issued with a nominal limit. We are also seeing a perception-although it’s impossible to say whether this is true or not-that subsidiaries of large and well-known multinationals come under much more scrutiny from a D&O perspective, particularly in emerging markets.

We have seen an increased understanding from buyers about this new D&O reality. And indeed, recent figures by US research firm Advisen showed that a high proportion of significant D&O losses do occur outside ‘home’ markets. Using these US figures as a proxy we would reasonably assume that up to a third of the larger losses-those over $10 million-might today occur in a different jurisdiction to that of the parent company.

Of course, these assumptions are based purely on some of the publicly available figures. In reality, many D&O liability losses remain confidential so these could just be the tip of the iceberg. With Swiss companies facing claims in the Netherlands, UK companies facing claims in Canada, and Dutch companies facing claims in Germany, D&O claims patterns are truly global.

Many European companies are waking up to the multinational angle of their D&O exposures.

They are becoming much more aware of the risks and the grey areas-and becoming less comfortable with them. At ACE, we are responding to a growing demand from customers for well-structured and clearly compliant global D&O insurance programmes.

Of course, the same principle can largely be applied to other areas of ’emerging risk’ such as terrorism and political violence and environmental. Indeed, at ACE we are seeing increasing requests from clients for more robust multinational solutions in these areas too.

We are currently conducting some new research so we can see how risk manager views have moved on from a year ago. One of the things we are looking for is evidence of how they feel about the multinational aspects of emerging risk. And across ACE we’ll be asking ourselves, how can we as an insurer work with brokers and clients to shape the strategic global solutions that they need in this new reality?