The down low on D&O risk in 2024
Clients will benefit from competitive market pricing for directors and officers (D&O) insurance in 2024, but can expect underwriting discipline to return, says Allianz Commercial’s D&O insurance report.
Of particular concern is inadequate responses by company directors and officers to economic and geopolitical pressures, flawed implementation of of technologies such as GenAI, and environmental, social, and governance (ESG) challenges, the report suggests.
Canadian clients should remain most wary of rising ESG risk, Allianz Commercial suggested in a statement to Canadian Underwriter.
Market conditions
Profitability challenges in 2020 and 2021 — which led to higher premiums, stricter terms, and reduced capacity in both primary and excess insurance — have largely eased, Allianz says. That means companies will see a more favorable D&O market in 2023.
New entrants entered the insurance market in 2023, resulting in ample capacity that fostered market competition. “When looking ahead to 2024, the market looks like it will remain competitive,” the Allianz report reads.
But class action activity in the U.S. may impact the market in the near term, especially for new D&O entrants with smaller portfolios.
“There are signs of underwriting discipline returning, as the market continues to assess the impacts of security class actions filings and increased defense costs, along with the realization of inflationary impacts, increasing regulatory scrutiny, bankruptcy rates and an active plaintiff’s bar, along with the backing of litigation funders.”
Driving factors
For Canadian companies and their D&Os, ESG litigation risk has steadily increased.
For example, there are more greenwashing actions, in which company directors or officers are accused of making misleading statements about or failing to follow through with their climate goals.
“Over the past couple of years, the Competition Bureau of Canada has opened several greenwashing inquiries prompted by environmental groups,” Allianz Commercial told CU in a statement.
“Examples include an inquiry into the alleged deceptive marketing practices of a Canadian natural gas association and complainants arguing that a bank’s continued financing of particular energy projects made its representations with respect to being a climate leader materially false or misleading.”
Public ESG enforcement is often followed through with class action.
“In January 2022, the Competition Bureau reached a settlement agreement in a ‘greenwashing’ case in which a coffee pod company paid a financial penalty following an investigation into the company’s claims that its single-use coffee pods were recyclable. A year later, a Canada-wide class-action lawsuit was filed in court against the company on behalf of individuals who had purchased these pods.”
Allianz warns company directors and officers could be subject to regulatory investigations or class action liability if they are accused of greenwashing.
Given a lack of clarity over what constitutes an ESG issue, directors and officers must be mindful about what they do or don’t convey about their company’s ESG commitments.
Meanwhile, the increased use of generative AI (GenAI) means organizations must ensure they’re adhering to legal and ethical protocols around its use.
Potential uses of GenAI are vast, almost as vast as the potential challenges. Cybersecurity threats could be heightened by implementation of GenAI tools. For example, tutorials on using AI for attacks are a very popular dark web search amongst hackers, according to a recent NordVPN report.
Not to mention, GenAI poses business threats in the form of increased regulatory risk, unrealistic investor expectations, responsible use cases, the potential for bias and more, Allianz writes.
In fact, litigation related to privacy risk and copyright law violations is already in the works against AI companies such as OpenAI, Microsoft and Google.
“Organizations can mitigate the risks associated with GenAI technologies by setting up best practices and deploying agile methods to keep governance, compliance protocols, and legal frameworks current and able to adapt to the technology as it evolves,” the report reads.
Ongoing inflation is not helping matters in the D&O line, especially since business insolvencies are expected to rise globally by 10% in 2024—a third consecutive annual rise, according to Allianz Trade.
Feature image by iStock.com/insta_photos
