Teri Solomon
Practice Leader Financial and Professional Practice Marsh JLT Specialty
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South Africa
While 2020 will be remembered as a difficult year for many people and organizations, the year ahead is not likely to be much easier for public company directors and officers. As companies and senior leaders plan for 2021, managing directors and officers liability (D&O) insurance programs and related risks will be crucial. Here are some D&O trends that risk professionals should watch closely.
The global commercial insurance market remains difficult, especially for buyers of D&O insurance: In the third quarter of 2020, D&O pricing for public companies rose more than 50%, with more than 90% of Marsh clients renewing with rate increases. In addition to higher pricing, public companies also face narrowing coverage, with underwriters no longer willing to provide some coverage enhancements that were previously available. This is especially true for harder-to-place risks, including life sciences and technology companies, cryptocurrency market players, and companies that are preparing to go public. Amid these challenges, companies are often being forced to make difficult choices, including reducing their limits and retaining more risk. Companies are also more focused on potential alternative risk transfer solutions where either capacity is lacking or pricing is deemed too egregious. Although some recent new market entrants should help increase supply and temper pricing increases in the long run, it will take some time before their influence is apparent. Difficult conditions for D&O buyers are expected to continue into 2021.
While the pandemic has had some effect on the D&O insurance market, there are several reasons why D&O prices are increasing, one of which is the ever-increasing cost of securities litigation.
An increasingly large share of these suits are derivative actions. Unlike traditional shareholder suits, which allege that companies and their senior leaders have violated their duty to shareholders, a derivative action is filed on behalf of a company against individual directors and officers, who are alleged to have violated their duty to the company. Many recent derivative actions are so-called “event-driven” suits, alleging that senior company leaders have failed to adequately respond to high-profile events and trends, including cyber-attacks, climate change, and allegations of sexual harassment.
In addition to growing in frequency, derivative suits are becoming more costly. While plaintiffs in derivative suits have historically settled for attorneys’ fees and changes in corporate governance — for example, a commitment to improving cybersecurity — they are now looking for compensatory damages as well.
Shareholder activism remains a significant concern for public companies and their directors and officers — and continues to succeed in altering corporate behavior and the balance of power between shareholders and boards. While activists have often made a variety of demands, including that companies be sold or broken up or directors of their choice be appointed, they are increasingly focusing their energies on environmental, social, and governance (ESG) issues. Notably, activists are demanding that companies prioritize diversity — across workforces and at the board level — and climate change.
Climate change, in particular, appears to be a topic that activists will continue to focus on in 2021. Shareholder activists are seeking greater climate-related disclosures in financial statements and that companies enact environmentally friendly policies, including taking steps to reduce their carbon footprints.
As activists pursue action on ESG issues, a worry for public companies is whether and how D&O policies will respond. Coverage for activism has traditionally been limited and varied by insurer and based on the nature of specific activities. There has been, however, a push among policyholders in recent years to clarify coverage. Insurers, meanwhile, have considered developing specific activist defense coverage grants; without such grants, however, insurers have generally determined whether to provide coverage on a case-by-case basis.
Achieving greater diversity and inclusion within boards has become an important objective for many stakeholders.
A number of public companies have been targeted in securities suits demanding that boards become more diverse. To date, these have generally taken the form of shareholder derivative actions alleging that directors and officers have breached their fiduciary duties by making false assertions about their commitment to diversity and the inclusion of women and people of color.
As shareholders, states, and exchanges press this issue, insurers are taking notice. Underwriters are asking detailed questions about board composition during renewal discussions, a trend that is likely to continue. Moreover, given the potential for costly legal decisions and settlements or regulatory actions, companies that do not demonstrate their commitment to diversity could see their standing with underwriters weaken.
As public companies ready themselves for potentially more difficult D&O insurance renewals in 2021, it is important to remember some best practices. Starting early is crucial, especially if you intend to market your program. It is also important to focus on building personal relationships with insurers — if underwriters see you as people rather than a company, it may be more difficult for them to say no to you.
Risk professionals should also:
Practice Leader Financial and Professional Practice Marsh JLT Specialty
South Africa