Demand for tailored D&O wordings and add-ons as ESG and cyber liabilities rise: GILC

By Rebecca Delaney

Feb 10 - (The Insurer) - D&O insurers are expanding their policy wordings to address new areas of risk amid rising demand for more tailored policies and add-ons for non-traditional D&O exposures, according to a new report by Global Insurance Law Connect (GILC).

GILC noted that the range of D&O risks has broadened beyond escalating regulatory pressure in the four years since its first D&O report, with respondents now expressing concern around non-traditional risks such as cyber liabilities, ESG-related exposures, and concerns related to employee wellbeing.

Legislation and regulation were cited as a primary concern for 74 percent of respondents, while more than half expressed concern around ESG factors (57 percent) and macroeconomic conditions (52 percent).

In addition, 48 percent of respondents cited cyber risk as having a strong influence on D&O market response. Other concerns included capacity issues, sustainability requirements, and the threat of class actions.

As GILC noted in the report, legislation and regulation impact every market as stakeholders' expectations over corporate governance increase. This has led to more assertive courts, as well as a growing number of claims being upheld.

In the past five years, 61 percent of respondents reported an increase in claims, while 55 percent noted that judges and regulators are more likely to uphold claims against individual directors. As a result, directors in every region are becoming more aware of their responsibilities and the liabilities that are associated.

This now includes ESG liability in the context of a culture of "responsibility for everything". ESG-related reporting was highlighted as a significant risk factor amid increasing expectations from stakeholders (including regulators, investors and consumers) around the importance of corporate reporting and communication.

GILC noted that the risks associated with ESG trends are particularly pronounced in certain markets where legislation is more mature, such as Australia, the US, UK, and many EU countries. In contrast, while some governments in less developed markets are starting to recognise the importance of ESG, regulatory frameworks and enforcement mechanisms remain in the developmental stages.

The report also highlighted that litigation is rising in most jurisdictions, with 58 percent of surveyed countries reported breaches of traditional fiduciary duties as a leading driver of litigation.

"The scope of fiduciary duties is clearly expanding, not only due to increasing regulations but also because applicants aim to bring D&Os into cases that would traditionally be corporate litigation, thereby accessing another ‘pot’ of insurance funds. This trend raises concerns both for the insurance industry and for boards," said the report.

Other triggers for rising litigation include economic stress, which leads to an increase in insolvencies and transaction failures. Respondents expressed a range of concerns, including shareholder derivative actions, insider trading, declarations of interest in transactions and the approval of transactions.

In addition, 29 percent referenced insurance coverage disputes, often concerning the scope of coverage, timeframe of coverage, settlement size, and subrogation.

"In a complex and fast-paced claims environment, this is not surprising; however, it raises questions about the clarity of policy wordings and how effectively coverage is communicated to buyers. This issue is prevalent across all markets, regardless of their level of development."

Policy wordings

Insurers are therefore expanding their policy wordings to address new areas of risk, with GILC identifying a strong correlation between shifting market demand and buyers' experiences with new or extended offerings at renewal.

Expectations around standard cover are rising, with buyers prioritising coverage for legal exposures arising from regulatory scrutiny, shareholder activism and governance lapses.

"Coverage for defence costs, settlements, and damages stemming from allegations of mismanagement or fiduciary breaches is increasingly regarded as crucial, especially as businesses and shareholders become more litigious and regulators more susceptible to influence," said GILC.

"Our member firms report that clients across jurisdictions are also seeking better cover for insolvencies and issues arising during mergers, acquisitions, and disposals. Key considerations for these clients include coverage limits, premium costs, and maintaining retroactive coverage, particularly during management transitions."

The report also identified growing demand for more tailored policies and add-ons for non-traditional D&O risks, including those outlined above.

Pricing dictated by market maturity

Overall, the report found an increased interest in D&O cover, with improved penetration within the SME sector regardless of how developed the insurance market is in their jurisdiction. Nevertheless, market maturity continues to dictate pricing.

On a global basis, 62 percent of respondents noted that prices have increased. When reviewing individual country responses, GILC noted that many are still in the early stages of insurance market development and are considered "relatively immature". In contrast, mature markets such as Australia, the UK and the Netherlands reported price decreases.

Different pricing dynamics between mature and developing markets are in part driven by the caution that characterises developing markets, as these tend to present a higher risk environment owing to a lower level of political and economic stability.

"Additionally, legal and regulatory frameworks in these markets are often less mature, resulting in uncertainties and higher potential for increased claims. These factors tend to drive up prices, particularly in the younger insurance markets, where a lack of historical claims data complicates accurate pricing," said the report.

Elsewhere, mature market were described as "borderline dysfunctional" as they have historically experienced significant pricing volatility due to fluid claims experiences. GILC noted that while declining prices are good for insureds, industry figures such as Chubb CEO Evan Greenberg and Lloyd's chief of market Patrick Tiernan last year issued "stark warnings" on the need to maintain underwriting discipline to provide some pricing stability.

Going forward, GILC expects that economic pressures will continue to reshape the D&O market globally, as an increase in insolvencies has led to a surge in claims brought by insolvency administrators across many regions, particularly, but not limited to, mature markets.

"Looking ahead to pricing conditions in 2025, respondents in more mature markets expect pricing to level off. This perspective applies to countries such as Australia, the UK, Finland, Germany, and Greece, which is a rapidly maturing market," the report concluded.

"Globally, economic uncertainty driven by geopolitical shocks, rising interest rates, and inflation is contributing to an increased risk of D&O claims. These pressures are reshaping the D&O insurance landscape worldwide, with no market left untouched."