• Allianz Global Corporate & Specialty (AGCS) highlights macroeconomic risks such as inflation and insolvency and their impact on Directors and Officers (D&O) insurance

• Cyber and ESG-related risks are driving an increasing number of lawsuits and litigation against companies and their boards

• US remains a securities class action hotspot, despite downward trend in new filings

• D&O insurance market seeing a favorable shift for buyers, but inflation and current risk environment means the potential for more frequent and severe losses remains

MUNICH, GERMANY - Media OutReach - 13 December 2022-Which are the main factors driving the possibility that a company and its board of directors may be sued by investors or other stakeholder groups in 2023? A poor financial performance or even insolvency amid economic uncertainty and the prospect of a global recession, a lack of robust cyber security and governance processes, or an inadequate or non-compliant response to environmental, social and governance (ESG) issues are among the key risk trends in the Directors and Officers (D&O) insurance space, according to Allianz Global Corporate & Specialty (AGCS). Despite a downward trend in new filings, US class action securities litigation remains a key concern, particularly around mergers, while cryptocurrency companies and exchanges are subject to increasing activity, the insurer's annual D&O report also notes. "The recent decline in the number of filed securities and class actions in the US, coupled with an influx of new entrants, has created a more favorable market for corporate buyers of D&O insurance after double-digit percentage premium increases across key markets in 2021," says Vanessa Maxwell, Global Head of Financial Lines at AGCS. "However, there is still a lot of risk facing insurers as macroeconomic issues and a potential slowdown loom, conditions which typically lead to an uptick in D&O claims. Inflation is likely to influence future claims through larger settlements. Cyber risk remains at an elevated level and is now seen as a core duty of D&Os, with increasing scrutiny on how they respond. Meanwhile, ESG-related liabilities – whether it is inadequate action on climate change or diversity and inclusion issues – can potentially become significant exposures for D&O insurance as well."

From the energy crisis to stock market volatility, it's a gloomy economic environment

For many countries, the economic outlook for 2023 is doom-laden with recession risk rising. Plunging growth rates, surging inflation, the energy crisis, continuing stock market volatility and ongoing supply chain issues are monitored closely by D&O underwriters as they could cause liquidity and profitability squeezes in many sectors and fuel rising insolvencies. "More than ever, D&O underwriters are focused on the financial strength of a company, particularly around liquidity. With global economic uncertainties progressing, carriers are closely monitoring if the trend of increased Chapter 11 filings (in the US), which impact both public and private companies will continue in 2023," says Katie Fioretti, Global Head of Management Liability Commercial at AGCS. Half of the countries analyzed by Allianz Research recorded double-digit increases in business insolvencies during the first half of 2022, with the SME sectors in the UK, France, Spain, the Netherlands, Belgium and Switzerland accounting for two thirds of the rise. Overall, insolvencies are expected to increase by +19% in 2023 globally. An economic downturn typically brings a higher risk of D&O claims: A study by broker Marsh found that between 2005 and 2007 the firm received an average of 200 to 300 D&O claims in the UK. With the onset of the financial crisis, claims notifications rose by 75% to around 500 in 2008, peaking in excess of 1,600 in 2012. In the US, filings and enforcement actions – a proxy for claims frequency – doubled to over 2,000 at their 2011 peak, compared to around 1,000 in 2006, according to Advisen. "The likelihood that a public company will be sued in a securities class action increases when financial performance is poor, a company's share price drops or there is a risk of bankruptcy. In such scenarios, investors may argue that the company failed to disclose the challenges it was facing to maintain its earnings guidance, driving a potential increase in D&O claims," says David Van den Berghe, Global Head of Financial Institutions at AGCS. Cyber risk management as a board responsibility and ESG exposures Issues such as data security and information protection are now core areas to watch for directors, the report notes. Investors increasingly view cyber security risk management as a critical component of a company's board risk oversight responsibilities. As fiduciaries, board members are therefore expected to develop and maintain accountabilities for...