In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for D&O.
Key developments in 2021
Following a significant hardening and self-correction of the D&O market in 2020, 2021 saw the market gradually stabilise with an inflow of new capacity following continued demand and more attractive premiums.
As lockdowns gave way to changing restrictions and disruption from health and safety measures throughout 2021, many businesses (particularly in hospitality, travel and entertainment) struggled to trade in challenging economic conditions. This compounded existing business exposures for D&O insurers, such as cyber security threats and large regulatory investigations (with the SFO agreeing 3 further DPAs and the FCA pursuing high profile criminal prosecutions for money laundering offences).
As expected, litigation related to sustainability and diversity issues continued to increase, with regulators, investors and legislators expecting companies to implement increased reporting on ESG issues and targets for board diversity, bringing further risk of litigation.
The active US market for shareholder class actions showed no signs of slowing, with emerging trends of claims related to SPACs and supply chain disruption. Attempts to pursue class actions in the UK and EU (particularly the Netherlands) have continued and are gaining traction in the public consciousness, despite the UK Supreme Court decision in Lloyd v Google not to approve an opt out class action for data breaches.
Despite these ongoing challenges, we did not see the anticipated wave of company insolvencies and related claims against directors materialise, mostly due to the continuation of government support measures, including the extension of the furlough scheme in the UK until the end of September 2021.
What to look out for in 2022
In the wake of COP 26, climate change remains firmly at the top of the agenda for 2022 with wide ranging measures in the UK, EU and US soon to be brought in requiring companies to make climate related disclosures in prescribed forms as well as measurable commitments to help reverse the effects of climate change.
We expect ESG related exposures to mature beyond activist shareholder claims, to companies and senior managers being held accountable for perceived discrepancies in reporting or failures to meet (voluntary or mandatory) commitments. The devil will be in the detail. ESG exposure to regulatory investigations (or claims following falls in share price) may also arise not only from external forces but internally from employees, as the SEC reported a new record high number of whistleblowing reports during 2021.
As the number of insolvencies in the UK crept back up to pre-pandemic levels and profit warnings continued throughout 2021, we still expect to see a delayed increase in insolvencies, and insolvency-related claims against directors, though it is likely to build slowly rather than snowball, as businesses have had time to prolong viability through additional funding and price increases.
We also expect the often forgotten "G" in ESG to get more focus in 2022 with new rules to improve corporate governance as a necessary means for executive teams to manage risk and business resilience. Given the ever increasing range of risks that businesses and their executives are exposed to, effective risk management will remain of vital importance to D&O insurers and insureds.
Written by Cristina Faro.
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