Insolvencies, Cyber Threats and ESG Scrutiny Drive 2021 Risks for Directors and Officers: Allianz

  • AGCS report identifies mega risk trends for directors and officers in 2021: Covid-19 pandemic and its economic fallout increase exposures for them to be held accountable for poor performance or management decisions
  • Nervousness in an already strained D&O insurance market about current risk environment compounded by “known unknowns” such as climate change, cyber and ESG challenges
  • Publicly-listed companies generally higher exposed, but litigation risk for private companies and their management increasing in the Covid-19 pandemic

NEW YORK--()--The Covid-19 pandemic has created a highly volatile and uncertain environment for businesses resulting in a litany of new or heightened risks for directors and officers (D&O) as well as exacerbating the situation in an already strained D&O insurance market, according to the new report Directors and Officers Insurance Insights 2021 from Allianz Global Corporate & Specialty (AGCS).

Rising insolvency exposures, growing cyber security threats and persistent securities class action activity are among the key risks for which D&Os of companies could be held liable. In 2021, companies also need to be on guard against “event-driven litigation” which can be caused by different triggers such as inaction on diversity, poor sustainability performance or for underestimating or misrepresenting Covid-19 related risks.

Growth in the number of lawsuits as well as rising claims frequency and severity has already resulted in a difficult environment for the D&O insurance sector in recent years. Underwriting results have been negative in many markets around the world, including Australia, the UK, the US and parts of Europe. While the market was correcting itself at the beginning of 2020, it was then hit by the current pandemic and economic crisis.

“Many insurers are still digesting the effect of previous pricing inadequacy and exposure and loss trend increases from prior-year policies,” says Shanil Williams, Global Head of Financial Lines at AGCS. “This is also at a time of great uncertainty around forward-looking exposure assessments, in particular the impact of Covid-19 on the economy in general and on specific industries. Combined with many ‘known unknowns’ like climate change, cyber risks or environmental, social or governance (ESG) factors, this has created a lot of nervousness in this sector. As a global D&O insurer, AGCS remains committed to working in partnership with our customers to ensure we have sustainable solutions for all parties involved.”

Top concerns
Forthcoming insolvency warnings are among the top concerns for the D&O insurance sector as insolvency is a key cause of D&O claims – insolvency administrators usually look to recoup losses from directors. According to Euler Hermes, the bulk of insolvencies is still to come through the first half of 2021, with its global insolvency index likely to hit a record high for bankruptcies, up 35% by end of 2021, and with top increases expected in the US, Brazil, China and core European countries such as UK, Italy, Belgium and France.

Companies also face a constantly evolving landscape of cyber security threats as ransomware attacks and data breaches continue to be on the rise, while the shift to remote working due to Covid-19 has generally increased security vulnerabilities. Investors view cyber risk management and adequate security standards as a critical component of a board’s oversight responsibilities.

Class actions and Covid-19 cases
Collective redress activity, particularly in the US, remains a key risk for any board of management although new US securities class actions filings were pacing about 18% behind rates seen in 2019 during the 1H of 2020, according to Cornerstone Research. This is largely due to the disruption of business and court activity caused by the pandemic. Nonetheless, the frequency of court filings is on track to match rates in 2017 and 2018 and will be well in excess of every year prior to those.

The percentage of new filings in 2020 targeting foreign-domiciled US-listed companies has been nearly twice the average in recent years, with around half of these against Asia-domiciled companies. Outside the US, securities class actions are being filed in record numbers and the threat of facing an action has increased in many jurisdictions, as highlighted in a recent AGCS and Clyde & Co report.

Shareholders have filed the first class action lawsuits directly related to Covid-19. Examples include suits against cruise ship lines that suffered Covid-19 outbreaks, as well as litigation regarding the business impact of the pandemic on companies’ financial performance or operations or misrepresentations about coronavirus-related therapies.

“Another threat looming on the horizon comes from the return to office steps taken by businesses. Such decisions are fraught with peril, with regard to shareholder derivative actions, but also in relation to other forms of litigation stemming from employees or customers,” warns Williams.

ESG and private company issues
Beyond financial performance and shareholder value it is increasingly ‘soft’ management topics that trigger so called “event-driven litigation” against boards: diversity, climate change or ESG concerns are increasingly seen as opportunities to bring class actions or to force a settlement. For example, Oracle, Facebook and Qualcomm are among the technology companies which have been subjected to diversity derivative lawsuits. In such cases shareholders typically allege that directors violated their fiduciary duties by their inaction on diversity issues such as remuneration or nomination of new black board directors.

While publicly-listed companies are generally more highly exposed to D&O risks, the situation of private companies also is aggravating. The Covid-19 pandemic is currently placing private companies and their executives under considerably higher litigation risk.

About Allianz Global Corporate & Specialty SE
Allianz Global Corporate & Specialty (AGCS) SE is a leading global corporate insurance carrier and a key business unit of Allianz Group. We provide risk consultancy, Property-Casualty insurance solutions and alternative risk transfer for a wide spectrum of commercial, corporate and specialty risks across 10 dedicated lines of business.

Our customers are as diverse as business can be, ranging from Fortune Global 500 companies to small businesses, and private individuals. Among them are not only the world’s largest consumer brands, tech companies and the global aviation and shipping industry, but also wineries, satellite operators or Hollywood film productions. They all look to AGCS for smart answers to their largest and most complex risks in a dynamic, multinational business environment and trust us to deliver an outstanding claims experience.

Worldwide, AGCS operates with its own teams in 31 countries and through the Allianz Group network and partners in over 200 countries and territories, employing over 4,450 people. As one of the largest Property-Casualty units of Allianz Group, we are backed by strong and stable financial ratings. In 2019, AGCS generated a total of €9.1 billion gross premium globally.

www.agcs.allianz.com

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Twitter: @AGCS_Insurance

Cautionary Note Regarding Forward-Looking Statements

Contacts

Sabrina Glavan
Allianz Global Corporate & Specialty
973 876 3902
sabrina.glavan@agcs.allianz.com

Erin Burke
Harden Communications Partners
631 239 6903
eburke@hardenpartners.com

Release Summary

Allianz report reveals a litany of new D&O risks in 2021 driven by insolvencies, cyber threats and ESG scrutiny

Contacts

Sabrina Glavan
Allianz Global Corporate & Specialty
973 876 3902
sabrina.glavan@agcs.allianz.com

Erin Burke
Harden Communications Partners
631 239 6903
eburke@hardenpartners.com