Following the US corporate collapses, reform of UK boardroom governance has speeded up. Gary Meggitt predicts that insurers can expect many more claims for liability in the coming years
I have neve ...
I have never cared for horoscopes. The late Dr Carl Sagan, in his award-winning TV programme Cosmos back in the 1980s, explained that the celestial bodies of the Zodiac had an insignificant effect on newborn children.
That was enough to convince me that the stars column in your average newspaper was a waste of ink. It is, therefore, with trepidation that I now foretell a great concern for insurers in the near future.
Enron's filing for bankruptcy on 2 December 2001 had profound consequences for the business world in general and the accountancy profession in particular.
It led to the conviction, and almost-certain demise, of Andersen. It launched a flotilla of regulatory reviews on accountants' and auditors' duties in the US and EU.
It prompted an estimated 110% hike in accountants' PI premiums. Then, as the tremors from Enron's collapse were subsiding, we discovered WorldCom had "misclassified" $7.2bn (£4.6bn) in its accounts. The pressure for root-and-branch reform was renewed.
That pressure is now bearing fruit.
The government has been very busy. Partnerships UK chairman Derek Higgs is reviewing the role of non-executive directors for the DTI. The first question in his terms of reference: "What role should non-executive directors perform and how does this compare to the present position?", demonstrates the potential consequences of his work.
In July 2002, the DTI received, and approved, the interim proposals of its co-ordinating group on audit and accounting issues. These included:
The strengthening of audit committees
The rotation of audit firms every five, rather than seven, years
A further review of the regulation of the accountancy profession.
The third proposal has already been taken up. On 8 October, the DTI published a consultation document on the review of the regulation of accountants and auditors in the UK. The closing date is 7 January 2003.
Finally, in July, the government published its White Paper - and draft Bill - Modernising Company Law. The measures the government intends to introduce include:-
A statutory statement of directors' duties
Operating and financial reviews - covering non-financial areas such as strategy, to company annual reports
An extended legal obligation on directors to "volunteer" information to auditors.
It is expected that a new Companies Act will reach the statute books by 2004.
The Enron-inspired reforms, whether they lead to legislation, regulations or simply a culture change, will accelerate this trend. The scope for claims, with a consequent increase in premiums to compensate, is likely to grow.
A new Companies Act and the Higgs Review may finally oblige UK businesses to purchase directors' and officers' (D&O) cover on the same scale as their US counterparts.
The introduction of a statutory schedule of directors' duties, with its objective standard of care (similar to that applying to other professionals) will prevent directors raising the legal defence that they did their "incompetent best". The strengthening of shareholders' rights will also increase the potential for claims against directors who fall short in the exercise of their duties.
There are, of course, many other problems ahead. The extension of the Road Traffic
(NHS Charges) Act  to all personal injury claims; the reform of Pool Re; US toxic mould and asbestosis claims; and flood cover worries are all causing sleepless nights.
The difference between these and the post-Enron reforms are that the latter affect not just what insurers do, but how they do it.
The "corporatisation" of insurance in the last decade means insurers cannot avoid these reforms simply by declining to write the relevant cover. Insurers will still be subject to these reforms - just like their insureds.
Gary Meggitt is a law lecturer at BPP Law School and consultant to Fishburn Morgan Cole