Directors' and officers' liability report 2023: trends and future risks

The global risks to directors' and officers' (D&O) continue to gather pace, meaning D&O insurers must continue to operate in a fast-evolving claims environment. Many of the trends affecting D&O insurance in recent years remain relevant – despite the speed at which world events are moving.

Introduction

Insolvency remains a significant concern and we will see more insolvencies in 2023 emanating from a volatile geopolitical landscape that offers rising inflation, increased energy costs and ongoing supply chain issues.

The associated risks with SPAC litigation activity continue and D&O insurers will be watching for a new type of breach of fiduciary duty actions. Class actions represent a notable risk trend and despite the differences in litigation environments, this type litigation once dominated by the US courts is now a concern for D&Os in other jurisdictions including the UK, Australia and across Europe.

In addition, the exposures associated with environmental, social and governance (ESG) present an important concern for the industry as a whole. ESG litigation continues to gain momentum, especially in relation to climate change; some of which attracts litigation funding. The risks attached to such actions encompass both financial and reputational consequences.

Accepting that society’s demands on corporations to address climate change are unlikely to wane, firms will be mindful that global regulators will be eager to find new ways to enhance climate governance. D&O insurers should, therefore, take the opportunity themselves to act as ESG monitors in their own right.

Key trends

This report examines the global risks to D&O insurers related to these key trends, including the relevant regulatory and legislative developments to watch.

Environmental, social and governance (ESG)

The UN’s Intergovernmental Panel on Climate Change (IPCC) sixth report published in March 2023 reported that, globally, we are no longer on track to limit global warming to the landmark 1.5C temperature target by 2050. A more concerted effort from global governments to achieve net zero is now required.

This stark message is reflected in the significant increase in global regulatory intervention in the ESG space that we have seen and will continue to see throughout 2023 as the drive for transparency, clarity and consistency needed to achieve net zero gathers pace.

Geopolitical risks

The impact of geopolitical risks – those risks associated with conflict or tension between countries or states – affect most lines of business, not least the D&O space.

There is also a clear relationship between the geopolitical landscape and other priority topics for D&O insurers, including high inflation, ESG considerations and reputational risk.

Technology

Developed by OpenAI, GPT or Generative Pre-trained Transformer, is a large language model that adopts machine learning, a subfield of artificial intelligence (AI), and is trained to generate text.

Where a company has suffered loss due to reliance on inaccurate ChatGPT outputs, D&Os may face claims for breach of fiduciary duty, for example, failing to take reasonable steps to protect the company’s financial information.

Mega litigation trends

A rise in excess claims inflation is being felt by global insurers across all lines of business. For D&O insurers, a key factor driving this trend is the rising prevalence of group actions.

These claims are increasingly directed at companies, for example, climate related derivative claims, which is of concern to both the board and individual directors, as well as their insurers.