Report | December 2021
Directors and Officers Insurance Insights 2022
Boards of management are vulnerable to a litany of business exposures, any of which could potentially derail the financial health, continued service and reputation of any company. Following are five D&O mega trends companies should watch for and guard against in 2022, according to Allianz Global Corporate & Specialty (AGCS) financial lines and D&O experts.
5 mega trends to watch in 2022
1. Uncertain insolvency outlook continues to concern
Many different projections were made during 2020 about the impact Covid-19 would have on the global economy, particularly with regards to anticipating an increase in the number of insolvencies. Those predicting a decrease in the number of insolvencies by the end of 2020 were in the minority, but this is, in fact, what happened. TheEuler Hermes Global Insolvency Index [1] ended 2020 with a -12% y/y drop, following a steady decline through the year.
Global insolvency index - quarterly y/y in %
The withdrawal of support measures for companies set the stage for a gradual normalization of business insolvencies. The Global Insolvency Index is likely to post a +15%y/y rebound in 2022, after two consecutive years of decline.
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Source: Euler Hermes, Allianz Research
2. SPACs exposure grows for D&Os
Although Special Purpose Acquisition Companies (SPACs) have been around for decades, 2020 was a breakout year. This surge grew into a high-octane investment in early 2021, accounting for more than 50% of newly publicly-listed US companies. During the first half of 2021, the number of SPAC mergers, both announced and completed, more than doubled the full year total of 2020 with 359 SPAC filings, garnering a combined US$95bn raised [2].
3. Market, climate change and digital issues for financial services companies
The financial services industry continues to face multiple challenges in terms of risk management. On the financial side, markets are likely to become more volatile with the increased risk of asset bubbles and inflation rising in different parts of the world.
Pressure increasing to disclose climate risk
Climate change litigation is beginning to target financial institutions. Cases have tended to focus on the nature of investments, although there is a growing use of litigation seeking to drive behavioral shifts and force disclosure debate. In November 2020, a case was settled involving a $57bn superannuation fund in Australia, Rest [3]. The claimant alleged Rest’s failure to disclose and address climate risk breached legislation. The fund committed to a raft of new disclosure and climate change-related initiatives in response. In July 2020, aclaim [4] lodged in the Federal Court of Australia alleged Australian investors trading in Government bonds would face “material risks” because of the Australian Government’s response to climate change and this was not disclosed to investors. This case is ongoing.
4. Heightened US litigation risk for non-US domiciled companies
A surge of new lawsuit filings, the recent openness of certain courts to extending long-arm jurisdiction, and a possibly record-breaking settlement announced in October 2021, point to heightened US litigation risk for directors and officers of non-US domiciled companies.
5. Increased risk of shareholder derivative suits under Caremark
In 1996, inIn re Caremark Int’l [5], the Delaware Chancery Court in the US set the standards for claims against corporate directors for lack of board oversight. In a derivative action, shareholders of health services company Caremark International Inc., alleged that the company’s directors, in neglecting to effect sufficient internal control systems, had breached their duty of care.
Market dynamics: the state of the D&O insurance sector
Billions of dollars of premiums are collected annually for D&O insurance but the profitability of the sector has suffered in previous years because of increasing competition, the growing number of lawsuits and rising claims frequency and severity. Underwriting results have been negative in many markets around the world, as event-driven litigation, collective redress developments, regulatory investigations and higher defense costs have taken their toll. Where will the market go in 2022?
D&O Insurance Structure
The structure of a D&O insurance policy depends on which of three insuring agreements are purchased (ABC policies are generally chosen, as these are standard form policies for publicly listed companies; for private or non-profit companies, only AB policies would be useful).
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| Cover | Description | Who is the insured? | What is at risk? |
| Side A | Protects assets of individual directors and officers for claims where the company is not legally or financially able to fund indemnification | Individual officer | His/her personal assets |
| Side B | Reimburses public or private company to the extent that it grants indemnification and advances legal fees on behalf of directors/officers | Company | Its corporate assets |
| Side C | Extends cover for public company (the entity, not individuals) for securities claims only | Company | Its corporate assets |
References
[1] Allianz.com, Global Insolvencies: We'll be back, October 2021
[2] CB Insights, What Is A SPAC?, Juli 2021
[3] Clifford Chance, Climate Change test case settles: $57bn Australian super fund responds to pressure on climate change policy, November 2020
[4] Lexology, 2021 Litigation Forecast - Climate change litigation: New risks for companies and directors, February 2021
[5] CaseBriefs, In re Caremark International Inc. Derivative Litigation
Image sources: Adobe Stock
Directors and Officers Insurance Insights -
5 Mega Trends to watch in 2022
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