In recent years various global and South African factors have together culminated in increased pressure on (re)insurance capacity in the Directors’ and Officers’ (“D&O”) Liability Insurance market.
Although there are exceptions, the years 2018 and 2019 have seen an increase in premium rates and in some cases coverage restrictions. This was however preceded by at least one decade of price stagnation and reduction. Despite some insurers (in the Lloyd’s market as an example) pulling out of certain lines of business, D&O capacity remains ample notwithstanding increases in claims trends.
The following is a discussion of some of the trends which may have an impact on the current D&O insurance market.
Class Actions
According to a Best’s Market Segment Report (the “Report”), securities class actions in the United States of America (“USA”) continue to be elevated which has led to increased claims frequency and severity for the D&O market. This has resulted from both class actions and derivative actions, with a high number of initial public offering related matters. The Report further states that class actions tend to increase in times of share price volatility. So far 2020 has seen unprecedented losses on markets worldwide a consequence being that there is an increased potential for D&O claims being notified.
In February 2020, a USA law firm filed a federal securities class action against Sasol Limited (“Sasol”) and certain of its directors in the United States District Court of Southern District of New York. According to the complaint this action is on behalf of persons who experienced American depository receipt price losses following Sasol’s activities at the USA based Lake Charles Chemicals Project. South Africa is not invulnerable.
In terms of South African law, derivative actions may be brought on behalf of companies in accordance with s 165 of the Companies Act 71 of 2008.
Class actions in South Africa have been developed through s 38(c) of the Constitution of the Republic of South Africa 108 of 1996 and in Children's Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others 2013 (2) SA 213 (SCA) class actions were extended to include civil damages claims.
Social Inflation
According to the Report, social inflation has gained traction for a decade and has played a role in increasing the costs of liability policies, especially D&O. According to a commentary article on the International Risk Management Institute’s (“IRMI”) website, social inflation can be described as rising costs of insurance claims resulting from trends in society such as increased awards against corporate policyholders, increased tendency to litigate, pressure for more liberal treatment of claims, changing views of social responsibility, and populism. In the last two years, South Africa has seen certain insurers (rightly or wrongly) amend coverage decisions following social pressure.
Further, an increase in allegations of sexual harassment (mostly in the USA) following the #MeToo movement has resulted in a rise in litigation. Boards of directors and management are often held accountable for promoting (or not doing enough to prevent) an environment which fosters the incidence of sexual harassment. Similarly, there has been an increase in litigation relating to discrimination and pay gaps.
Cybersecurity
Cybersecurity is one of the greatest risks which businesses face in the digital age. As is well known, and confirmed in the Report, directors and management are expected to understand, execute and be accountable for information technology (“IT”) safeguards. Traditionally company directors have been well versed in the accounting, legal and business fields; IT was always left to a division (if that) or completely outsourced. This has resulted in a lack of skills among directors in the IT field globally, which is even more critical in terms of cybersecurity.
Legislation and regulations are being put in place worldwide, such as the European Union’s General Data Protection Regulation (“GDPR”) and South Africa’s Protection of Personal Information Act 4 of 2013 (“POPIA”) to better safeguard IT. In South Africa, even corporate governance requirements have incorporated IT for over a decade. In terms of the King IV Report on Corporate Governance for South Africa, 2016 (“King 4”), technology and information governance is dealt with under Principle 12. The recommended practice is that the governing body should exercise ongoing oversight of technology and information management, particularly (among other things) “… intelligence to identify and respond to incidents, including cyber attacks and adverse social media events.”.
Some of the potential IT threats to boards of directors, management and D&O policies in general are; failure to put adequate cybersecurity measures in place, non-disclosure of cyber breaches, inadequate disaster recovery planning, and fines and penalties.
Litigation Funding
Under a champertous agreement, one person provides financial support to a litigant in return for a share of any resultant proceeds. Such arrangements date back to Roman times but fell out of favour with the legal community. In South Africa, this changed in 2004 following a decision in Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA). Globally litigation funding has expanded as a type of investment, often providing attractive returns and accessed through regulated asset managers. The combination of factors leading to increased litigation risk for boards of directors means that the prospect of litigation funding will escalate the incidence of large class actions.
COVID-19
The novel coronavirus disease (“COVID-19”) has, in a relatively short space of time, changed the entire world. We have probably not yet seen out the worst of it, and most of its effects will be unforeseen and will manifest for decades. The full impact on the insurance industry cannot yet be estimated, but the consequences for D&O insurance should be considered by all relevant stakeholders. Should whatever will be considered as appropriate measures to safeguard companies, not be taken by boards of directors, potential liability could arise. This is in a time when businesses are under enormous pressure due to no trading, resulting in possible insolvencies, cutting of costs (including insurance at the worst possible time), and class actions. The insurance industry’s reaction will as always show its true commitment to fair outcomes for customers.
Conclusion
Throughout the world, especially in South Africa, there has been a general trend towards a hardening insurance market. Although there are exceptions and reinsurance capital is not short, extremely low pricing and deteriorating loss experience have led to a change in market conditions over the last two years. It is in trying times such as these that the insurance industry has the opportunity to demonstrate its true value to customers.
Bibliography
AM Best “Expanding Risk Exposures Present D&O Insurers with Significant New Challenges” 24 February 2020 Best’s Market Segment Report US D&O Liability
Anderson B “A glance at the law of champerty” October 2016 Volume 16 Issue 9 Without Prejudice https://www.hoganlovells.com/en/publications/a-glance-at-the-law-of-champerty (Date of use: 26 March 2020)
Children's Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others 2013 (2) SA 213 (SCA)
Companies Act 71 of 2008
Constitution of the Republic of South Africa 108 of 1996
Institute of Directors of Southern Africa NPC King IV Report on Corporate Governance for South Africa 2016
Price Waterhouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA)
Schiffer L “Social Inflation: What Is It and Why Should Reinsurers Care?” https://www.irmi.com/articles/expert-commentary/social-inflation-what-is-it-and-why-should-reinsurers-care (Date of use: 25 March 2020)
Lucian Carciumaru
Chief Operating Officer
Camargue Underwriting Managers
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