AGCS D&O Insurance Insights: Eight Key Takeaways for 2019

The environment and landscape that Directors and Officers (D&O) navigate on a daily basis is becoming more complex and risky, writes Nobuhle Nkosi D&O expert at Allianz. Regulator, investor and public expectation of boards continues to intensify, and the personal accountability for not meeting these expectations is well on the increase.

The shift from corporate responsibility to personal responsibility continues at a steady pace, and it is advisable to note that if these expectations are not met, then the propensity to litigate is now given extra ‘fuel’.

This would be due to the following factors: further emergence of collective actions, increased capital flow into shareholder activism and the growth of litigation funding, which is now seen as an alternative asset class producing high returns.

Boards operate under this spotlight in uncertain economic and political times where equity and asset price volatility is the norm.  Below are global and regional trends that D&Os need to stay up to date on over the next 11 months:

1. Board culture is in the spotlight more than ever before. Boards are expected to set the tone for an organization’s culture and a poor culture is a key indicator for potential D&O claims. A major factor in the many claims that we see is compliance failings.
2. A failure of boards to recognize, manage and mitigate a number of Emerging Risks will result in both personal liability and securities claims. These include managing company cyber risk, protecting intangible assets and reducing intangible liabilities, protecting brand and reputation value and addressing climate change disclosures. For example, there have already been incidents where investors have sued boards for a lack of oversight following cyber events. At the same time, general disclosures to the markets are becoming more regular and with platforms like Twitter, reactions are faster than ever before.
3. Cross-border trade, supply chains and international co-operation of regulators continues to make the cost of defending and settling D&O claims more complex and costly. At the same time global rules around trade are in flux and navigating this environment is a challenge for management.
4. Boards face an increasingly digital world where efficiencies and productivity are measured, as well as where strategic decisions and investments in the “Internet of Things”, blockchain and Artificial Intelligence are being made daily. Shareholders will scrutinize the decisions and investments.
5. International Programs are growing in popularity and need as cross-border risk evolves with collaboration among regulators, insurance and tax entities. Ensuring the D&O insurance policy is fit for purpose in the local market can be crucial at the time of loss. This is of critical importance when a non-indemnifiable claim is made against a director in a country where non-admitted insurance is not allowed.
6. There has been a recent trend towards shareholders seeking to hold directors liable for losses as a result of the negligent or reckless conduct. The statutory underpinning for such claims is the Companies Act No.71 of 2008, which codified directors’ liability in South Africa. A recent example would be the Dutch-led class action of the alleged destruction of over R 185-billion in shareholder value resulting from the long-running accounting irregularities at Steinhoff.
7. South African businesses and its directors need to be aware of General Data Protection Regulation (GDPR) as well as the Protection of Personal Information (PoPI) Act. For companies that comply with the PoPI Act, complying with the GDPR should not be an issue, however there are certain changes within the companies that will have to be made to ensure compliance.
8. Claims teams and legal counsels will increase in value as D&O exposures evolve and increase and experience is critical at these “moments of truth”.  We see a trend of relationships being built pre-loss as part of an overall D&O risk mitigation strategy.

A board’s role in creating the necessary culture that enables the sustainable development of a business would appear to be unclear and this works against the business, its growth, development and future successes. Boards should be encouraged to collectively create their organization’s culture and where necessary improve their understanding of their organisations’ culture, and the mechanisms by which culture is influenced.

It is also important to not only factor in but also address external factors that could have an impact on the board in how they carry out their duties. Due to the broad spread of the effect of these external factors, boards should engage with their appropriate business association as well as one another, in determining the highest priority issues and the most effective means of addressing them.

D&O market continues to evolve

D&O exposures are on the increase as companies have grown in size and international reach, and the environment for directors and officers to navigate has become more treacherous. With exposures increasing materially, so will the frequency and severity of D&O claims.

From an insurance perspective, we continue to see an increase in international programs, a need for higher capacity, and more focus on stand-alone Side A capacity. Companies are also buying standalone cyber, M&A and reputational covers to supplement D&O and address issues of executive concern.

Allianz continues to be committed to the D&O segment and will continue to look to build new long-term D&O relationships, particularly in the South African market where we are expanding our team.

This article is a global update to our recent report D&O Insurance Insights – Management Liability Today: What Executives Need to Know