Directors’ and Officers’ Insurance – What’s changed and why it is affecting your business.
If you’ve been trying to source Directors’ and Officers’ cover recently, you may have noticed some unwelcome changes in the offers received from insurers. Business owners looking to secure D&O insurance have generally seen an increase in premiums, coupled with a reduction in the extent of cover available.
Directors’ and Officers’ insurance is an important cover as it protects you as a business director and your key managers (officers) against the financial cost of compensation claims for alleged wrongful acts. This can include breach of trust or duty, negligence, health and safety concerns, pollution, trespass or defamation and more. Without this cover you and your business may face significant legal costs, fines and even compensation awards if a claim is made against you. And your personal assets may be at risk too.
There are a variety of internal factors which will affect what an insurer is willing to cover at a given premium. These include factors such as the size of your company, number of employees, the industry you operate in and current market trends. The package you are offered will also be affected by your management ability, the business ownership structure, and number of years you have been in business, as well as your operating costs, the scope of your business, financial security and any previous claims.
External factors also influence the insurer’s appetite for D&O cover. Over the last two years we have seen political, ecological, social and economic changes, and of course, the pandemic, impacting the availability and cost of D&O cover.
We take a closer look at these external factors and how they have been affecting the availability and premiums of Directors’ and Officers’ insurance.
Increased regulatory scrutiny
The risk to insurers has increased because industry regulators are paying closer attention to what firms are doing. Regulatory scrutiny has increased because of the global financial crisis and recent high profile corporate scandals such as at Volkswagen and Tesco, and the collapse of large well-known brands including Carillion and BHS. The regulators are keen to hold wrongdoing individuals to account in a bid to uphold market confidence and to protect consumers and employees.
The list of regulators that can bring action against a business include the Financial Conduct Authority (FCA), the Prudential Regulatory Authority (PRA), the Health and Safety Executive (HSE), the Environment Agency (EA), the Pensions Regulator (TPR). In addition, businesses may face private prosecutions.
New risk exposures
Cyberattacks have become more common, widening the risk exposure for insurers. The pandemic brought a surge in ransomware and phishing attacks, well reported over the last two years. Climate change risks, along with environmental and sustainability issues have had an impact on D&O too. Companies are being asked to disclose their climate change risks, and increasingly liability for environmental damage is now likely to fall to company directors.
ESG (Environmental, Social and Governance) is a new risk area as investors and stakeholders are keen to see businesses demonstrate their support and compliance in these areas. Business growth may be affected if investors pull out, and there is an increasing potential for litigation, based on issues surrounding ESG. Regulators are also looking at these non-financial factors much more closely.
Of course, the pandemic has played a part too, as you would expect. Insurers are being cautious and watching to see what impact the pandemic is having on UK businesses and how they will react as government financial support is withdrawn. Whilst company directors are aware of their increased exposure to risk and are requesting greater limits for their D&O cover.
New FCA Regulations
The UK Government has introduced legislation this year, in the new Financial Services Act 2021 which, in turn, caused the FCA to strengthen some of its existing rules and guidance. These cover changes to money laundering provisions, an increase in the maximum penalties for insider dealing and a more streamlined procedure for the FCA when cancelling a firm’s permissions in respect of regulated activities.
The regulator is also increasing its investigative activities, which can be time consuming and costly for businesses, if they are found to be in breach of terms, paying particular attention to money laundering, bribery and corruption, pension fraud and data protection failings.
The Law Commission is also considering whether additional ‘failure to prevent’ offences should be introduced, and where it can be proven that an individual’s actions are considered those of the company, if the ‘identification principle’ should be reformed.
All these changes could lead to an increase in prosecutions for company directors and officers, which means that the risk for insurers increases too.
UK Audit Reforms
Further uncertainty has been added with the Governments proposed reforms to the UK’s audit regime. These changes will apply to large organisations and those considered a Public Interest Entity (PIE). The plans here aim to ensure that large organisations are more transparent about their finances, which should ultimately help to avoid company failures and safeguard jobs.
One of the suggestions announced by the Department for Business, Energy and Industrial Strategy (BEIS), is to make directors individually responsible for the accuracy of the company’s financial statements. There may also be new performance metrics to meet, including climate change targets and a need to publish annual resilience statements. Should these proposals go ahead the requirement for adequate Directors’ and Officers’ cover is likely to increase significantly for the directors of these affected firms.
Whilst smaller firms do not fall under the new reforms, it would be prudent to expect there to be some knock-on effect, although what that will be remains to be seen. We’ll keep you posted on any changes that we see filter through if and when these reforms are adopted.
What can you do?
We recommend undertaking a review of the risks you’re facing now and think about those you may face in the future in your position as a Director or Officer. Ensure that the D&O cover you have in place is enough to settle any claims should any be made against you.
Making sure you adhere to any requirements by regulatory bodies within your industry would be a good start. Ensure you are operating as transparently as possible, and your accounts are up to date and in order. Make sure your contingency plans are in place for perceived threats such as a cyberattack are up to date and documented. Everyone at a senior level should understand their responsibilities and accountability.
Look at your ESG policies and make sure you are able to clarify your position on each.
Depending on the industry you operate in, your ESG may include:
Environmental – the conservation of the natural world
- Waste and pollution
- Resource depletion
- Greenhouse gas emission
- Climate change
- Energy efficiency
- Recycling processes
- Emergency preparedness
Social – the consideration of people and relationships
- Employee relations and diversity
- Employee benefits
- Working conditions
- Impact on local communities
- Health and safety
- Data protection and privacy
Governance – the standards for running a company
- Tax strategy
- Executive remuneration
- Donations and political lobbying
- Corruption and bribery
- Board diversity and structure
- Ethical standards
- Shareholder rights
- Stakeholder engagement
Finding a reliable commercial broker to help you establish your position and arrange the right level of D&O cover for your situation is imperative. If you are unable to meet any costs arising from a claim made against you, your business may not survive, and your personal assets could be at risk.
At Barnes Commercial, we partner with our clients to offer a comprehensive risk management service, which includes arranging Directors’ and Officers’ cover as part of a Management Liability package.
We’ll look at what you and your business need to protect it from the unexpected, so you can enjoy complete peace of mind. Our experienced commercial brokers are there to support you with advice and guidance whenever you need it.
To arrange an appointment to discuss your commercial insurance solution, please call us on 01480 272727 or send an email to email@example.com