Lawsuits, bankruptcies are top risks for executives in 2020 – Allianz
The big trends that company executives need to watch out for in 2020 are lawsuits arising from “bad news” events, impact of climate change, business failures, securities claims and growing litigation funding.
A new report by Allianz Global Corporate & Specialty (AGCS), a global corporate insurance carrier and Allianz Group's key business unit, has highlighted five big trends, which will have significant risk implications for senior management – or directors and officers (D&Os) – of companies in 2020 and beyond. The report, “Directors and Officers Insurance Insights 2020”, released on Thursday, says corporate management are under the spotlight like never before and the range of risks facing company executives – as well as the resultant insurance claims scenarios – has increased significantly in recent years.
According to the report, the five big trends that company executives need to watch out for in 2020 are lawsuits arising from “bad news” events, impact of climate change, business failures, securities claims and an expanding market of those funding these litigations.
The AGCS report also examines some of the factors that are driving recent changes in the D&O insurance market after a period of sustained large loss activity. An estimated $15 billion worth of premiums are collected annually for D&O insurance, according to AGCS.
“D&O insurance addresses the intrinsic strategic risks of corporations and their senior management," Shanil Williams, Global Head of Financial Lines at AGCS, said. “AGCS continues to see more claims against D&Os emanating from ‘bad news’ events not necessarily related to financial results. Scenarios include product problems, man-made disasters, environmental disasters, corruption and cyber-attacks.”
The insurer said "event-driven” litigation often results in significant securities or derivative claims from shareholders after the bad news causes a fall in share price or a regulatory investigation. Such events, AGCS also said, results in aggregation issues where multiple policies may be triggered. For example, one event could trigger aviation, environmental, construction, product recall and cyber insurance policy claims.
According to the Harvard Law School Forum on Corporate Governance and Financial Regulation, of the top 100 American securities fraud settlements ever, 59 per cent were event-driven. More insurance claims have also resulted from the #MeToo movement.
Failure to disclose climate change risks will increasingly result in litigation in the future, according to the AGCS report. To date, there have already been climate change cases in at least 28 countries around the world with three-quarters of those cases filed in the United States. The cases allege that companies have failed to adjust business practices in line with changing climate conditions.
AGCS also expects to see increased insolvencies, which may potentially translate into D&O claims. Business insolvencies rose in 2018 by more than 10 per cent year-on-year, owing to a sharp surge of over 60 per cent in China. Business failures are set to rise for the third consecutive year by more than 6 per cent in 2019.
“Political challenges, including significant elections, Brexit and trade wars, could create the need for risk planning for boards, including revisiting currency strategy, merger and acquisition (M&A) planning and supply chain and sourcing decisions based on tariffs. Poor decision-making may also result in claims from stakeholders,” said Nobuhle Nkosi, Head of Financial Lines at AGCS Africa.
The report also said securities class actions are growing globally as legal environments evolve. AGCS said it has seen increasing receptivity of governments around the world to collective redress and class actions.
These trends, the insurer said, are further fueled by litigation funding, which is now becoming a global investment class, attracting investors hurt by years of low interest rates and are searching for higher returns. The US accounts for roughly 40 per cent of the market, followed by Australia and the United Kingdom.
The market is also opening up in other areas such as the recent authorizations for litigation funding for arbitration cases in Singapore and Hong Kong. India and parts of the Middle East are predicted to be future hotspots. Litigation funding, according to AGCS, reduces many of the entrance cost barriers for individuals wanting to seek compensation.
“Over the past year the D&O market has seen major changes and likely will experience further volatility in 2020,” said the Global Head of Financial Lines of Allianz’s corporate insurer. “One of the best defenses to protect against such volatility is for risk managers and their D&Os to maintain an open dialogue with underwriters and brokers, so that all parties can gain a better understanding of the risk culture and governance within an organization.”
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