Factors such as climate change and cyber security could lead to an uptick in D&O claims next year

“Known unknowns” such as climate change, cyber risks and environmental, social or governance (ESG) factors have “created a lot of nervousness” in the directors’ and officers’ (D&O) insurance market, according to a new report by Allianz Global Corporate and Specialty (AGCS).

The report, titled Directors and officers insurance insights 2021, has identified a number of key risks that could influence potential D&O claims next year.

This includes Covid-19 linked insolvency as “insolvency administrators usually look to recoup losses from directors”, the firm said.

David Van den Berghe, global head of financial institutions at AGCS, added: “The impact of the gradual phasing out of temporary policy measures designed to support companies is one of the key concerns for 2021.”

Furthermore, evolving cyber risks – such as ransomware attacks and data breaches – could also pose problems for senior leaders in terms of D&O claims, especially since the rise in remote working due to the pandemic has impacted firms’ cyber security.

“Investors view cyber risk management and adequate security standards as a critical component of a board’s oversight responsibilities,” AGCS said.

’Soft’ management influences

AGCS added that “soft management topics”, such as diversity, climate change or ESG concerns, could also be used to bring about event-driven litigation against boards.

In cases like these, “shareholders typically allege that directors violated their fiduciary duties by their inaction on diversity issues such as remuneration or nomination of new black board directors”, the company said.

Joana Moniz, global head of commercial financial lines at AGCS, continued: “Social justice protests, activist investor campaigns or money laundering schemes could all develop into litigation trends, as could single catastrophic events such as a plane crash or the California wildfires.

“Generally, D&Os of privately-held companies are more closely involved in all of the company’s operational topics and business decisions. This can more easily translate into being held personally liable through different forms of litigation.”

In the US, class action lawsuits and litigation around Covid-19 cases may have a knock-on effect to the D&O market.

“Shareholders have filed the first-class action lawsuits directly related to Covid-19,” AGCS said.

“Examples include suits against cruise ship lines that suffered Covid-19 outbreaks, as well as litigation regarding the business impact of the pandemic on companies’ financial performance or operations or misrepresentations about coronavirus-related therapies.”

Shanil Williams, global head of financial lines at AGCS, added: “Another threat looming on the horizon comes from the return to office steps taken by businesses.

“Such decisions are fraught with peril, with regard to shareholder derivative actions, but also in relation to other forms of litigation stemming from employees or customers.”

Williams continued: “Many insurers are still digesting the effect of previous pricing inadequacy and exposure and loss trend increases from prior-year policies.

“This is also at a time of great uncertainty around forward-looking exposure assessments, in particular the impact of Covid-19 on the economy in general and on specific industries.

“Combined with many ‘known unknowns’ like climate change, cyber risks or ESG factors, this has created a lot of nervousness in this sector.”