- “Bad news” events, the impact of climate change, bankruptcies and political challenges have increasing risk implications for directors and officers (D&Os)
- Growth of securities class actions and third party funding globally means litigation against companies and their D&Os is on the rise. US, Canada and Australia see the highest activity but these trends are developing around the world
- The profitability of D&O insurance sector impacted in recent years due to increasing competition, growth in lawsuits and rising claims frequency and severity. Further volatility anticipated
1. More litigation coming from “bad news”
2. Climate change litigation on the rise
3. Growth of securities class actions globally
Securities class actions are growing globally as legal environments evolve. AGCS has seen increasing receptivity of governments around the world to collective redress and class actions, particularly across Europe but also in other territories such as Thailand and Saudi Arabia. At the same time, the level of filing activity in the US has been at record highs in recent years with over 400 filings in both 2017 and 2018, almost double the average number of the preceding two decades. This increased activity is impacting both US and foreign companies which have securities listed directly in the US.
With global law firm, Clyde & Co, AGCS has compiled a risk map in the report which assesses the risk of a company being subject to a securities group action in a particular jurisdiction, taking into account the availability and prevalence of third-party litigation funding, which is regarded as a strong factor in increased group action activity around the globe. While countries such as the US, Canada and Australia see the highest activity and most developed securities class action mechanisms, overall, such mechanisms are developing and strengthening around the world with the Netherlands, Germany, England and Wales showing notable development and increased activity in recent years.
4. Bankruptcies and political challenges impact
5. Litigation funders spread across the world
All of these megatrends are further fueled by litigation funding now becoming a global investment class, attracting investors hurt by years of low-interest rates searching for higher returns.
Litigation funding reduces many of the entrance cost barriers for individuals wanting to seek compensation, although there is much debate around the remuneration model of this business. Recently, many of the largest litigation funders have set up in Europe. Although the US accounts for roughly 40% of the market, followed by Australia and the UK, other areas are opening up, such as recent authorizations for litigation funding for arbitration cases in Singapore and Hong Kong. India and parts of the Middle East are predicted to be future hotspots.
The challenging D&O insurance market
Although it is estimated around the US $15bn worth of premiums are collected annually for D&O insurance the profitability of the sector has been challenged in recent years due to increasing competition, growth in the number of lawsuits and rising claims frequency and severity. AGCS has seen double-digit growth in the number of claims it has received over the past five years.
Insurers are facing more legal costs due to increased activity, as well as more settlements and claims. Another issue is that “event-driven” litigation results in aggregation issues where multiple policies may be triggered. One event could trigger both D&O and either aviation, environmental, construction, product recall or cyber insurance policy claims, for example.
“D&O insurance addresses the intrinsic strategic risks of corporations and their senior management, and over the past year the D&O market has seen major change and likely will experience further volatility in 2020,” says Williams. “One of the best defences to protect against such volatility is for risk managers and their D&Os to maintain an open dialogue with underwriters and brokers so that all parties can gain a better understanding of the risk culture and governance within an organization.”