Recession, cyber and ESG risks highlighted for directors and officers in 2023

Lawsuits affecting companies and board members arising from cyber risks and Environmental, Social and Governance (ESG) risks are on the rise, according to directors’ and officers’ liability (D&O) insurer Allianz Global Corporate and Specialty (AGCS).

Macroeconomic risks such as inflation and insolvency, as the economy tips into recession, will also impact D&O, the insurance firm said. The US remains a securities class action hotspot, although there has been a downward trend in new filings, AGCS said.

Lastly, the D&O insurance market is seeing a favourable shift for buyers, but inflation and the risk environment are, according to AGCS, creating the potential for more frequent and severe losses.

“The recent decline in the number of filed securities and class actions in the US, coupled with an influx of new entrants, has created a more favourable market for corporate buyers of D&O insurance after double-digit percentage premium increases across key markets in 2021,” said Vanessa Maxwell, global head of financial lines, AGCS.

“However, there is still a lot of risk facing insurers as macroeconomic issues and a potential slowdown loom, conditions which typically lead to an uptick in D&O claims. Inflation is likely to influence future claims through larger settlements.

“Cyber risk remains at an elevated level and is now seen as a core duty of directors and officers, with increasing scrutiny on how they respond. Meanwhile, ESG-related liabilities – whether inadequate action on climate change or diversity and inclusion issues – can potentially become significant exposures for D&O insurance as well,” she added.

AGCS described the economic environment as “gloomy” across many countries, from the energy crisis to stock market volatility and recession risks, meaning that profitability and cash flow are front of mind for D&O underwriters.

“More than ever, D&O underwriters are focused on the financial strength of a company, particularly around liquidity,” said Katie Fioretti, global head of management liability commercial, AGCS.

Regulatory action or litigation risks due to ESG-related issues are another major concern for boards, driven by increasing reporting and disclosure requirements around such topics, which could trigger claims in case of an inadequate response or non-compliance.

Companies and their boards also face the prospect of increasing litigation from environmental or climate groups, activist investors or even their own employees.

Climate change litigation is increasing, with AGCS citing over 1,200 cases filed internationally in the last eight years, compared with just over 800 cases between 1986 and 2014.

Another risk highlighted by AGCS is misrepresenting ESG credentials or achievements – so-called greenwashing – which can also lead to regulatory action, litigation and shareholder suits.

“ESG-related information is increasingly becoming a key checkpoint for insurers when it comes to the risk assessment of a company. Those companies with strong ESG frameworks and governance will likely find insurers more willing to offer capacity,” Maxwell added.