Surpassing exposure
In our current environment, where regulation is fast changing, companies need to be well prepared for possible exposures. It is critical for companies to have proper frameworks and insights in order to mitigate risks when they arise.
FAnews recently attended AIG’s Financial Lines Claims Seminar, in which panellists’ armed attendees with a vast amount of information that is essential to surpass liability exposure.
Jose Martinez, Vice President Financial Lines Major Loss Claims, Europe, Middle East and Africa (EMEA), mentioned that, “the regulatory environment facing the directors of today's companies is more rigorous, thus subjecting them to closer scrutiny from shareholders, customers, employees, suppliers and regulators.”
Facing scrutiny
Subject to the above Heleen Ferguson, Financial Lines and Casualty Claims Manager, Financial Lines SA provided a scenario in which Director’s and Officer’s Liability (D&O’s) cover is essential.
“Matome Maponya ("Maponya"), the Managing Director of a clay mining company, Blue Platinum Ventures, was the first director to be held personally liable for mining related environmental damage, resulting in the degradation of the Village of Batlhabine situated in Limpopo. The company failed to undertake rehabilitation measures requested by the departments of environmental and mineral affairs. Maponya was sentenced to five years, suspended on condition that he rehabilitates the damage within three months, estimated at a cost of R6.8 million. Maponya was not given the option of a fine,” said Ferguson.
She further highlighted that environmental damage is becoming increasing prevalent in South Africa. “With the recent introduction of class actions into our legal system and willingness of courts to find directors personally liable for environmental damage, the fate of directors of companies involved in activities which affect the environment is uncertain,” continued Ferguson.
“As the public’s trust has been shaken, D&O’s have come under fire more and more. With such turmoil, in the face of these “bet-the-company” claims, it is essential to be prepared,” said Martinez.
Martinez explained that, “more claims are made outside the home jurisdiction of policyholders due to international expansion. There is growing European shareholder activism, increased bankruptcy related mismanagement claims, unprecedented regulatory scrutiny, more disqualification proceedings, company versus insured and derivative actions on the rise.”
The trusted employee
A recent AIG report showed that over the past two decades, employee crimes have seen a dramatic rise in prevalence. The unpleasant statistic is that about 90% of company fraud is carried out by a company's own employees, and it is usually by it’s managers and supervisors.
According to the 2013/2014 Kroll global fraud report, findings for Sub-Saharan Africa show vendor, supplier or procurement fraud is at 23%, internal financial fraud or theft is at 27%, theft of physical assets or stock is at 47%, misappropriation of company funds is at 17%, while African companies affected by fraud is 77%, an average percentage of revenue lost to fraud is 2.4% and the biggest driver of increased exposure is IT complexity.
Martinez said, “The average duration of fraud is four years. From findings employee dishonesty is dominant, but third party fraud is on the rise. Ironically, best-rated countries on the Corruption Index are the countries where we have experienced high severity losses (USA, UK, and France).”
Undiscovered consequences
The AIG report also highlights that the frequency and severity of lawsuits against professional service providers has been on the rise for last few years. This has been fuelled by countless customers who believe that they have suffered when professional services did not live up to their expectations.
“As a result of the change in Financial Advisory and Intermediary Services (FAIS) regulations, there has been a considerable increase of claims against Financial Services Providers (FSPs). However, the Ombudsman has become rather favourable towards the customer. We expect to see more claims on incorrect investment advice in the SA market,” said Linda Sepala, Financial Institutions Practice Leader EMEA.
Avoiding corporate scandals
“We continue to see financial institutions pro-actively settling with clients, with limited opportunity for insurers to review liability and quantum.But some considerations include wrongful advice/disclosures/unsuitable investments, negligent administration of trusts, regulatory implications and volatile markets,” said Martinez.
“Over the course of the past few years, the public has witnessed egregious corporate scandals. In the wake of these problems, major financial institutions have found themselves facing increasing concerns over litigation and, in some instances, bankruptcy,” said Sepala.
She further mentions that various instances of alleged malfeasance by industry participants and a steady increase in frequency and severity of claims have brought urgency and intricacy to risk management for financial institutions. “Crime relating to financial institutions claims is not frequent, however large when received. In Africa, crime in banks is often a result of weakness in controls, no internal audits conducted and collusion between management and employees,” continued Sepala.
Taking action
Martinez mentioned that insurance brokers need to satisfy themselves that policy requirements are in fact understood by the client. General warnings and standard explanations attached to proposals are not enough.
Shanil Williams, Regional Countries Manager Financial Lines EMEA added that, “cyber claims education on exposures is also key, as all industries are exposed. The first 72 hours are critical to mitigating losses for cyber claims.
“Active questioning to find more facts about the client is key. Record keeping varies greatly from one insured to another and improvement where electronic files are kept is also essential,” concluded Martinez.
Editor’s Thoughts:
Brokers need to ensure that liability cover is in place to mitigate risks when they arise. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
The reasonable man must be preserved but our society is too diverse for just one reasonable man to represent the reasonable men and women accross our income groups, cultures and traditions.
Otherwise we may be risking everything while we are still learning what these regulations and responsibilites all require. Report Abuse