How inflation, and possible recession, may create D&O headaches

Faced with wide-ranging global macroeconomic risks that include supply chain disruptions and labor shortages, stock issuers need to be careful about any disclosures and public statements.

This is especially true for publicly traded companies that have directors and officers (D&O) insurance coverage.

“They’re going to run into trouble where they are not properly identifying, not properly planning for, or not properly quantifying these exposures – or frankly downplaying them,” said Robyn Campbell, practice leader for the financial and professional lines (FINPRO) team at Marsh Canada.

“If companies fail to properly address these issues in their disclosures, it could result in claims.”

Issues around D&O availability and affordability appear to be abating, Canadian commercial brokerages report. After more than two years in a hard market that restricted capacity and toughened pricing, the second half of 2022 is seeing some softening.

Two factors are in play, said Campbell. First, new D&O carrier participants are entering Canada’s market. Second, carriers’ expectations that initial public offerings (IPOs) would be a big money-maker in 2022 ultimately fell flat.

“IPOs have dried up,” she said. “So now [carriers] are working on holding onto what they have so that they can come as close as possible to their numbers. When you combine those things – new competition and the drying up of the IPO market – we have seen some recent dramatic decreases in the pricing of public D&O.”

Private D&O is a different story.

“There is real competition happening, particularly [at the] primary and low excess layers,” said Campbell. Likewise, companies with open claims or earnings challenges aren’t likely to benefit from any market softening.

From a carrier perspective, she added, the threat of a looming recession will see underwriters actively assessing companies’ risks. “They are looking for resilience and a plan to get through that shrinking economy. If we are in fact heading into a recession, clients will need to be prepared to answer [carriers’] questions about their plans.”

Plus, companies are seeing inflation result in higher interest rates, rising materials costs and ballooning payrolls. All those things are expected to affect profitability.

“We are looking at a real potential risk of increased bankruptcies, both in the private and public space. And when those bankruptcies happen, we do typically see an increase in D&O litigation because the actions and activities of the board…are going to be scrutinized – and scrutinized very closely,” said Campbell. “And then you see the claims as a result.”

Inflationary times also mean clients need to revisit their limit adequacies.

“If you have a $100-million tower, it does not go as far as it did three years ago,” she added. “That $100 million feels and behaves a lot differently if you’re unfortunately involved in a very serious securities class action, so we want clients to look at their limits and be comfortable.”

 

This article is excerpted from one that appeared in the December 2022-January 2023 issue of Canadian Underwriter. Feature image by iStock.com/bunhill