Cyber and ESG-related concerns among D&O trends for 2023 – report

Alongside macroeconomic risks such as inflation and insolvency, cyber and ESG-related risks are likely to pose the biggest potential threats to companies and their boards in the year ahead, according to the annual D&O report from Allianz Global Corporate & Specialty.

A poor financial performance amid economic uncertainty, a lack of robust cyber security and governance processes, or an inadequate or non-compliant response to ESG issues are all among the key risk trends in the D&O insurance space, warns AGCS. It adds that despite a downward trend in new filings, US class action securities litigation remains a key concern, particularly around mergers, while cryptocurrency companies and exchanges are subject to increasing activity.

Vanessa Maxwell, global head of financial lines at AGCS, said: “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.

“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 a core duty of D&Os, with increasing scrutiny on how they respond. Meanwhile, ESG-related liabilities – whether it is inadequate action on climate change or diversity and inclusion issues – can potentially become significant exposures for D&O insurance as well.”

Half of the countries analysed by Allianz Research recorded double-digit increases in business insolvencies during the first half of 2022, with the SME sectors in the UK, France, Spain, the Netherlands, Belgium and Switzerland accounting for two thirds of the rise. Overall, insolvencies are expected to increase by 19% in 2023 globally. AGCS says that an economic downturn typically brings a higher risk of D&O claims. A study by broker Marsh found that between 2005 and 2007 the firm received an average of 200 to 300 D&O claims in the UK. With the onset of the financial crisis, claims notifications rose by 75% to around 500 in 2008, peaking in excess of 1,600 in 2012.

The report also warns that issues such as data security and information protection are now core areas to watch for directors, with investors increasingly viewing cyber security risk management as a critical component of a company’s board risk oversight responsibilities.

Rishi Baviskar, global cyber experts leader at AGCS’ Risk Consulting team, said: “Around the world, directors have already been called to account, including in derivative and direct litigation, due to their alleged failures to institute appropriate governance and protection against cyber security risk.

“Major breaches experienced by publicly traded firms have damaged investor confidence, causing share price drops, and thereby becoming ‘events’, which again can give rise to costly class action securities litigation. Boards therefore need to initiate and implement a cyber risk management structure that covers the entire organisation.”

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