AGCS highlighted five megatrends that will be of interest to senior management in insurance companies in its recently released ‘Directors and Officers Insurance Insights 2020’.
- The risk of ‘bad news’
The first risk is the threat of more litigation in ‘bad news’ events that are generally unrelated to a company’s financial results. An example pointed out in the report is the high number of incidents and litigation following the #MeToo movement.
The insurer said it has already seen an increase in claims against companies arising from “event-driven” issues such as man-made disasters, environmental disasters, and product problems, and it expects to experience more in the future. These can be potentially ruinous because event-driven litigation often results in aggregation issues, where multiple policies can be triggered. For example, one event could trigger both D&O and either aviation, environmental, construction, product recall, or cyber-insurance policy claims. And the prevalence of such incidents and payouts should not be underestimated; AGCS said of the top 100 US securities fraud settlements, 59% were event-driven.
Meanwhile, cyber incidents represent another kind of event-driven risk that has resulted in a number of securities class actions, derivative actions and regulatory investigations, and fines against companies that have been victims of hacking or have suffered significant data losses. And as enforcement around the EU’s General Data Protection Regulation (GDPR) picks up, AGCS expects an acceleration of legal claims in 2020.
- The risk of climate change
Another risk area is, unsurprisingly, the predominance of climate change as a talking point. Companies are increasingly likely to face litigation in the future due to failure to disclose climate change risks, said the report. Climate change cases have already been brought in at least 28 countries around the world, with three-quarters of them being filed in the US, and there is an increasing number of cases alleging companies have failed to adjust business practices in line with changing climate conditions. AGCS said companies will have to consider the impact of this when looking at strategy, governance, risk management, and financial reporting.
- The risk of corporate insolvencies
Another megatrend identified by AGCS is the increased risk of corporate insolvencies, potentially exacerbated by unusual political challenges (such as the UK and its Brexit negotiations), which could trigger D&O claims. Business insolvencies rose in 2018 by more than 10% y-o-y, and by the end of 2019, business failures are set to rise for the third consecutive year by more than 6%, with two out of three countries poised to post higher numbers of insolvencies than in 2018. AGCS said political challenges, including significant elections, Brexit, and trade wars, could create the need for better risk planning for boards, including revisiting currency strategy, M&A planning, and supply chain and sourcing decisions based on tariffs. Poor decision-making, on the other hand, could result in legal claims from stakeholders.
- The risk of securities class actions
The fourth megatrend is the growth of securities class actions globally as legal environments evolve. The US, Canada and Australia still lead the field in terms of the number of class actions that take place; the level of filing activity in the US has been at record highs in recent years, with more than 400 filings in both 2017 and 2018 – almost double the average number of the preceding two decades. However, other countries where collective redress has either been low or practically non-existent are now beginning to take an interest in promoting it as a tool to hold companies to account. For example, the Netherlands, Germany, and the UK have shown increased activity in terms of collective redress in recent years, as have countries such as Saudi Arabia and Thailand.
- The risk of litigation funding
Related to this, AGCS listed litigation funding as its fifth megatrend and said its growth is being fuelled by investors searching for high returns. Many of the largest litigation funders have set up in Europe, and other areas are opening up, such as recent authorisations for litigation funding for arbitration cases in Singapore and Hong Kong. AGCS expects India and parts of the Middle East to be future hotspots, too. M