D&O professionals series
WTW’s Financial, Executive & Professional Risks (FINEX) Practice collaborates with professionals throughout the directors’ and officers’ (D&O) liability insurance industry to gain perspective into the many facets of our business. In our “D&O Professionals Series,” we feature professionals from various corners of the industry, from executive D&O underwriters to securities litigators to coverage counsel and others. Our objective is to discuss how ever-changing conditions in the broader economy and in business have impacted D&O risk, securities litigation and our industry more broadly.
WTW: Looking ahead, what is your short-term and long-term D&O market outlook?
Beazley: The D&O market has gone through a softening phase, with rates consistently dropping across various segments of the Financial Lines Division. However, the manner and magnitude of these reductions are not consistent across the board; they are significantly influenced by the specific industry and the unique circumstances of each company. For instance, for companies post-IPO, DeSPAC situations, or industries that have been particularly affected by the pandemic, the decreasing rates appear to be a form of normalization. Conversely, in certain sectors, the reductions seem more like an overcorrection.
Reflecting on the influence of the broader macroeconomic landscape, the D&O market has surprisingly veered in a direction that contrasts with the somber economic forecast. Despite mounting concerns of economic and geopolitical instability and looming recession, the market has emerged as more client-centric and competitive.
In the short term we continue to see a slowing down of rate reductions, broader coverage and increasing capacity . However depending on capital needs that some of the “new” (post 2021) markets may have next year this may help to stabilise the market. Further still, if the US imposes more extensive trade tariffs, we can also expect a flattening of rates.
In the long term however, we expect a stable D&O market that supports businesses as they navigate an accelerating risk environment stemming from technological transformation, climate risks and ESG regulation and geopolitical volatility.
If rate reductions would eventually continue for those large market cap and US listed companies over the next 18-24 months then we will end up in an environment of inadequate rates, increase in reinsurance costs and reduction in capacity which will potentially increase rates.
An stable and consistent market environment often spells good news for brokers, clients, and carriers alike.
WTW: What makes for an effective meeting in the current environment? If you were to attend a meeting now, what would you want to hear from insureds?
Beazley: From a financial lines perspective and focusing on D&O insurance, the conversation should still be centred around the financial stability of the business (business profitability and solvency).In our analysis, we assess accounts individually, keeping the economic context as a backdrop. We focus on how companies align their operations with the current economic environment and whether they're implementing strategies to protect against potential negative impacts of economic downturns.
From COVID-19 to current ongoing wars, we understand how interconnected the risk landscape is, as can be seen by the impact on global supply chains. It has therefore become increasingly important to consider how businesses, reliant on these global supply links, are being impacted by delays and shortages.
However, as the risk landscape broadens, we also want to explore how the company is dealing/preparing to deal with ESG regulation (not only the E!) and potential related reputational risk. We also want to understand how a company is addressing technology changes, taking into account what tech they are investing in to avoid technological obsolescence and their approach to AI and the risk associated with introducing AI into their business.
In general we are very interested in building our understanding when it comes to our clients’ outlook for the future, what are they worried about, how resilient are they, and what support do they need to outperform.
WTW: Are there any emerging exposures across public or private D&O causing profitability pressures?
Beazley: Yes, as mentioned above, in an era of accelerating risks – there are some aspects to take into account that can definitively affect a company’s profitability:
WTW: WTW’s Global Directors’ and Officers’ Survey this year showed a big change over previous years, with the subject of “Health & Safety” coming out as the number 1 risk concern for directors and officers. Does that reflect your expectations and what do you think could be the reason for the change?
Beazley: This is what the “S” in ESG refers to, particularly regarding health and safety. Our Risk & Resilience research shows how important employee liability is becoming, with almost a quarter of the global executives surveyed ranking employer risk as their top boardroom concern this year. Despite this, just as many executives feel unprepared to manage this risk.
Employers need to balance an array of competing employee challenges. This includes the rising threat of high-profile employment tribunals, the rise of AI recruitment software and concerns over bias, an increasingly polarized diversity, equity and inclusion (DEI) debate, new regulations and hybrid working and changing expectations of Gen Z. Every business, in every sector, globally, is affected.
Finally, let’s not forget that the use of AI could lead to a host of claims around discriminatory bias, unfair recruitment and even redundancy claims. Going forward employers must be able to demonstrate that any AI-systems used are handling and processing recruitment and employee data in a safe, secure, and fair manner.
A company’s work health and safety policy, including in relation to mental health and well-being, could differentiate itself from its competitors. Against the backdrop of these emerging risks, a comprehensive employment practices liability (EPL) insurance cover solution can contribute to this risk mitigation.
WTW: In this year’s WTW Global Directors’ and Officers’ Survey, for the first time in many years cyber-related risks were not at the very top of the list as a concern. Do you think there’s any reason to believe that cyber-related risks are not as serious as they were a year ago, or are you as concerned as ever about cyber risks (or maybe even more so)? Do you think that not having enough broad cyber insurance coverage can increase D&O risks?
Beazley: We are certainly seeing a growing blind spot around the nature of cyber risk. Our Cyber & Technology Risk report found that executive’s concern over cyber risk is dropping – with only 26% ranking this as their top risk, compared to 34% in 2021. Yet, perceived cyber risk preparedness is down to 75% compared to 80% in 2022. Beazley’s claims data shows us that businesses are not as prepared as they could be, and there is an urgent need to educate firms on the changing face and sophistication of cyber crime as well as the importance of ‘always on’ cyber resilience strategies.
Businesses should be building an ecosystem of cybersecurity, one that is pre-emptive,, which involves horizon scanning to identify risk blind spots and emerging threats, responsive, and adaptive. Having a full spectrum approach is part of a wider risk mitigation strategy that can help to reassure investors and promote best practice internally.
Last year’s CrowdStrike event clearly demonstrated that those organisations with strong protocols managed the risk and subsequent interruption relatively well, while those with weaker preparation struggled with their resilience.
C-suite executives are ultimately responsible for their firm’s risk management of cyber and technology risks. If they get this wrong, it is likely to result in business interruption, reputational damage and potential regulatory issues, as well as directors’ & officers’ liability claims. Firms need insurance programmes that cover the full spectrum of cyber risks they face.
WTW: Do you think AI will be a material D&O risk over the next three years? Why or why not?
Beazley: Yes, we think AI will play a role in the D&O risk landscape.
Our research reveals that a quarter of firms surveyed are planning to invest in new technologies, such as generative artificial intelligence (AI), this year, and 68% agree that AI will lead to jobs being replaced in their company.
The traits inherent to generative AI can generate both regulatory and reputational risk. On the regulatory side, the EU is ahead with the AI Act set to be complemented by the AI Liability Directive (linked to claims taken by parties where damage was either (i) caused by an AI system or (ii) caused by the failure of an AI system to produce a specific output).
AI is also linked to risks coming from breach/infringement of IP, privacy and data breaches, discriminatory or biased outcomes based on the use of algorithms (AI increasingly being used in HR-based systems ), and in general incorrect or unreliable outputs.
Currently, we are watching the impact of AI misuse and how that plays out both in the courts and legislature throughout 2024. In the US, we are seeing a trend towards AI related securities class actions (according to Corneston Research report from July 31, 2024, “Securities Class Action Filings:2024 Midyear Assessment” there were a total of 31 AI-related securities suits filed during the period 2020 to the end of the first half of 2024, with six of them filed in the first half of 2024).
WTW: What do you envision the securities litigation environment looking like in the next 12 to 18 months?
Beazley: From a CE perspective, US-style collective actions did not exist in many of the Continental European countries until last year. In the countries where they existed (except for the Netherlands) they were rather ineffective due to the strict access requirements.
Since June 2023, the EU Representative Actions Directive has been transposed into national laws and Representative actions are generally allowed in the EU. Litigation funding is expressly allowed by the EU Representative Actions Directive and in general, the litigation funding market has been growing over the past few years, from 1bn in 2019 to an expected 1.6bn in 2025 (according to European Litigation Funders Association).
There are more litigation funders in Europe now, as well as experienced US plaintiffs’ firms opening offices in Europe to access these markets.
In any case, we would predict that the securities litigation landscape in Europe will be more litigious, due to the new regulatory risks (fines, claims by consumers etc) that arise from the new EU legislation mentioned in the prior questions (CSRD, CSDDD, EU AI Act, NIS2). All this legislation entered in force recently or is about to enter in force , so we will be seeing first regulatory investigations from 2025 onwards.
