New and emerging risks continue to drive Directors and Officers insurance uncertainty

Global and local influences, including the impact of increased community expectations, regulatory requirements and need for greater transparency around culture and wider environmental performance continue to affect the New Zealand market for Directors & Officers (D&O) liability insurance.

A report published today by the Institute of Directors (IoD), Dentons Kensington Swan and Marsh NZ, highlights that the NZ D&O insurance market will be impacted by an increasing number of factors including the global ascent of environmental, social and governance (ESG) matters, increased regulatory obligations, and responding to the impact of covid-19.

D&O insurance – a rising sea of change discusses the complexities of long-term business sustainability facing boards today, and the resulting wariness of insurers concerned that changing regulatory and stakeholder expectations will increase director’s exposure to new and emerging areas of risk.

IoD Chief Executive Kirsten Patterson says climate reporting, and broader sustainability reporting, is increasingly considered standard business practice and this puts new pressures - and potential liabilities - on directors.

“Directors are facing new challenges as they seek to navigate their organisations through changing regulatory, shareholder and societal expectations. While insurers are worried about the impact of these increasing obligations on directors, we are pleased to see boards have focused their attention on them,” Ms Patterson says.

“The IoD’s 2021 Director Sentiment Survey saw a rise to 48% of boards saying they were engaged and proactive on climate change risks, a significant increase from 35% in 2020.”

Steve Walsh of Marsh NZ believes the insurance industry is factoring in expectations that the advancement of climate-related disclosures will drive broader ESG reporting requirements for a range of organisations.

He sees five C’s as the key areas of focus for Boards providing information for Insurers when considering D&O cover: Culture, Conduct, Cyber, Climate change, and Covid management.

“We are seeing increasing global scrutiny of climate action, environmental impacts and a demand for sustainability reporting more generally from investors and governments. This is causing the insurance industry to take a cautious approach to D&O insurance and to seek more information from companies before setting policies,” says Mr Walsh.

Dentons Kensington Swan’s David Campbell says the evolving class actions regime and the growth of the third party litigation funding market in New Zealand, are some of the matters driving uncertainty in the 2022 D&O insurance market.

“Companies seeking to obtain insurance cover for directors in the face of new and evolving areas of risk need to navigate this rising sea of change,” says Mr Campbell.

New Zealand’s insurance market is dominated by US and Australian owned insurers, which increases the impact of global trends on local market conditions. The report found that increasing obligations on directors, and in turn increasing potential risk in the D&O insurance market, is flowing through to premiums and to the extent of coverage available.

Steve Walsh from Marsh NZ also notes average increases of between 30-50% were seen in 2021 premiums for coverage offered to NZX listed companies, as a result of insurer’s considerations of these factors.