The directors and officers of most large companies already benefit from insurance to protect them from claims about their management decisions. Now, as Liberty’s Gerald van Loon tells Andrew Wragg, managers of smaller organisations are also seeking to limit their exposure in an increasingly uncertain financial climate.
In the wake of the Northern Rock crash and the sub-prime debacle, Liberty vice president Gerald van Loon answers eight key questions about directors’ and officers’ insurance.
What impact will the current downturn in the economy have on D&O claims?
One of the main factors behind D&O claims in the UK is corporate insolvencies. The number of insolvencies in the past 18 months has been steadily increasing, with 3,210 companies going into liquidation in England and Wales in the first quarter of 2008, according to the Insolvency Service. This number is predicted to increase in the next two years to levels last seen during the dotcom bubble in 2002 and, probably more significantly, will affect every sector of industry.
We would therefore expect to see an increase in both the frequency and severity of D&O claims arising out of insolvency.
Do you expect rates to harden rapidly in the market or has this already happened?
Rates in the financial institutions market are stabilising on the back of the US sub-prime crisis. We are still observing rate reductions in the commercial D&O market but have noted that these reductions are slowing down.
We expect rates to increase in two to three years’ time in D&O/FI as more claims are notified and insurance companies are asked to pay out on claims.
Have British directors and officers learnt the lessons of the Northern Rock and other financial collapses? Has the uptake of D&O insurance increased and, if not, how should brokers be marketing it to their clients?
We hope so. But history has a tendency to repeat itself. Northern Rock is the latest in a long line of collapses: Barings Bank, The Bank of Credit and Commerce International and Independent Insurance, to name but a few.
The uptake of D&O insurance has not significantly changed as most large, publicly listed companies already benefit from D&O cover. However, we have seen an increase in uptake from companies at the small and medium-sized end of the market.
The main reason for the growth in the small and medium sectors is the increase in exposures that these companies are facing in conducting their business. As already mentioned, there is an increased risk of insolvency because of the financial climate but this is not all they have to consider.
There is a growth in legislation facing companies, not just from the UK government but also from the EU. These include changes to the Companies Act 2006 which came into effect earlier this year, the Corporate Manslaughter & Corporate Homicide Act 2007, and the Environmental Liability Directive, which should become law later this year.
This increase in exposure and the headlines that have gone along with this have raised the profile of D&O insurance within the small and medium enterprise market and so more policies are being purchased.
“We expect a number of insolvency actions against directors and officers as a result of the liquidity crisis and the high cost of finance
What is the UK D&O market worth in terms of GWP?
It is difficult to estimate the value of the UK D&O market, as a significant portion of this market is London wholesale business (ie, international business placed in the UK market). If we had to put a figure on we would say in the region of between £200m and £250m (excluding UK international wholesale market).
How does the approach to D&O differ between the UK and the US?
In the US, the approach to D&O very much focuses on shareholders’ class actions – litigation used for large numbers of people whose cases involve common questions/issues. However, this type of litigation is still not permitted under UK law, and we do not expect the law to change in the foreseeable future.
In the UK, our risk analysis is very much focused on corporate insolvencies, but we do also recognise that UK companies may have a US listing. Our approach is also much broader as directors and officers in the UK have responsibility to all stakeholders and not just shareholders (ie, employees, suppliers, customers and also people living in the environment around the company).
Globally, what level of D&O claims do you expect as a result of the sub-prime crisis and ensuing financial turmoil? Which institutions will be hit the worst and which insurers are exposed?
The market estimate is in the region of $5bn in claims globally since the crisis began. We anticipate around 100 to 125 US shareholder class actions to be filed against mortgage lenders, large financial institutions and investment banks, who will be hit the worst.
We also expect a number of insolvency actions against directors and officers as a result of the liquidity crisis and the high cost of finance. The number of these is more difficult to quantify at this stage.
Most D&O insurers will carry a degree of exposure but those worst hit will be the larger D&O carriers – but we are not going to name names.
Has the D&O market reached maturity?
Yes. At the top end of the market there is a degree of maturity in the larger institutions to the extent that most of them buy D&O cover. The two main areas of growth in this sector of the market are that they are looking to buy larger limits and also looking to buy Side A cover for the directors. A Side A claim occurs when a director is liable and the company is insolvent, so unable to indemnify them.
The take-up is still fairly low among small and medium-sized companies, so that is still an area of growth for D&O business.