Frankfurt The industrial insurer Allianz Global Corporate & Specialty (AGCS) sees a number of risks for executive and supervisory boards in the coming year. These included high inflation, a rising number of corporate bankruptcies, cyber attacks and speculative bubbles in certain assets.
In addition, shareholders in the USA are increasingly suing foreign companies and the so-called Spacs, shell companies for faster stock exchange listing, are giving rise to new liability risks for managers. That emerges from a study that AGCS published on Wednesday.
“Stakeholders are increasingly scrutinizing what companies and their management are doing and what they stand for – and this often leads to lawsuits and lawsuits,” says Shanil Williams, Global Head of Financial Lines at AGCS.
In this environment, Directors and Officers Liability Insurance (D&O) remains important. It protects board members, managing directors and supervisory boards from having to answer for mistakes with their private assets. However, the policies have recently become very expensive, which is due, among other things, to major losses, for example at Volkswagen and Wirecard.
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Insurance capacities are still scarce
The D&O market is stabilizing, says Williams from AGCS. At the same time, he admits that insurance capacities are still scarce in some segments. Many companies would like to have higher coverage, but the industry does not necessarily offer the desired levels of coverage.
According to a survey published by the General Association of the Insurance Receiving Industry (GVNW) for the 2020/21 renewal round, companies had to accept significant price increases for their managers’ D&O insurance.
In around a quarter of those surveyed, the increases were between 50 and 100 percent, in 15 percent they were even more than 100 percent. The companies also complained about lower insurance sums and worsened conditions.
The industrial insurance broker Marsh observed this fall that the premiums for D&O insurance continue to rise, in some cases drastically, and that insurers are continuing to reduce the capacity provided per contract. In particular, companies that are in a tense financial situation, that are burdened with damage or that are listed on the US stock exchange, would have to reckon with significant effects.
One reason for the price increases is that the line of business has become a losing business for numerous insurers. According to the industry association GDV, the loss rate after settlement last year was 110 percent. The gross expenses for insurance claims after settlement were thus significantly higher than the gross premiums earned.
AGCS ‘Williams emphasizes, however, that the market restructuring is well advanced, including in its own portfolio. The area of D&O insurance is slowly offering opportunities for profitable growth in selected areas that one wants to take advantage of.
Insolvency risks should be the focus in 2022
Managers are exposed to particularly high liability risks in the event of bankruptcy. Since the support measures for companies that were set up because of the corona pandemic are running out, credit insurers in this country expect an increase to 15,500 to 17,000 corporate bankruptcies in the coming year, after around 15,000 bankruptcies this year.
In addition, financial service providers in particular face numerous challenges in risk management, according to AGCS. The outlook for the markets is more volatile as the risk of asset bubbles rises and inflation rises in different parts of the world. At the same time, companies would have to adequately document and disclose climate-related risks, which could lead to new legal disputes.
In addition, during the corona crisis, many companies sent their employees to the home office – a gateway for hacker attacks: “Management can be held liable for inadequate precautions,” emphasizes AGCS expert Stephan Geis.
Increased risk of litigation in the US
Shareholder lawsuits pending in US courts against foreign companies can also become a problem for top managers. Geis observes that there are increased legal risks for board members of companies with US business.
He refers to a record-breaking settlement in October 2021. The defendant Chinese company Renren, known as the “Facebook of China”, agreed to pay at least $ 300 million to settle a legal dispute. Shareholders accused management of wrongdoing in a New York court.
AGCS sees a new risk in the so-called Special Purpose Acquisition Companies (Spacs) – shell companies that enable a faster way to a stock exchange listing. The growth of Spacs in Europe is still well below that in the USA. But it can be assumed that, despite the less favorable corporate law in European countries, it will continue to pick up speed. However, Spacs are associated with some special insurance-relevant risks; the first D&O claims have already been reported.
More: Manager liability is a loss-maker for insurers