Directors and Officers Insurance Insights 2022

Report | December 2021
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.
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. The Euler Hermes Global Insolvency Index [1] ended 2020 with a -12% y/y drop, following a steady decline through the year.
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.

Source: Euler Hermes, Allianz Research

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].
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.
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, a claim [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.
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.
In 1996, in In 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.
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?
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

[1], 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

Allianz Risk Barometer

  1. Cyber incidents (45%) - 2021 rank: 1 (52%)
  2. Changes in legislation and regulation (27%) - 2021 rank: 4 (23%)
  3. Loss of reputation or brand value (22%) - NEW

Annual survey identifying business risks

A trio of Covid-19 related risks heads up the 10th Allianz Risk Barometer 2021, reflecting potential disruption and loss scenarios companies are facing in the wake of the coronavirus pandemic. The annual survey on global business risks incorporates the views of 2,769 experts in 92 countries and territories, including CEOs, risk managers, brokers and insurance experts.

Top 3 risks in the Professional Services sector in 2021

  1. Cyber incidents (46%) - 2019 rank: 1 (40%)
  2. Business interruption (32%)
  3. Loss of reputation or brand value (29%) - 2019 rank: 5 (21%)

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With our worldwide network, Allianz Global Corporate & Specialty (AGCS) is one of the very few global insurers with an exclusive focus on the needs of global corporate and specialty clients.