Rising D&O Premiums puts focus on Corporate Governance

Rising D&O Premiums puts focus on Corporate Governance

Directors and officers liability insurance (D&O) premiums have been soaring over the last 12 months or so, leading to ministers and business leaders raising concerns. Corporate governance and the role of company secretarial services then becomes even more critical to manage these premiums and the risks that the increasing premium reflect.

Rising D&O Premiums

According to insurance broker Marsh, D&O premiums have had ‘triple-digit increases’ and, here at Elemental, we have seen clients with good history and that are well run, experiencing increases of 150-200% on the previous year.

As reported in the Financial Times today (paywall), UK government officials are talking with executives in the insurance sector about the rising cost of D&O Insurance and there are mounting fears that these premiums are going to start to cause real issues, particularly for smaller companies. Some insurers have even left the D&O market.

D&O Insurance premiums always tends to rise during a recession as the risk of litigation increases. There is also an ever increasing focus on corporate governance which is causing insurance companies to become nervous. In particular, there is the prospect of new rules to make directors personally responsible for the accuracy of financial statements (the government’s plans on this may even be published this week) and there is a fear that this could cause premiums to rise further.

Corporate Governance impact on premiums

What does this mean for corporate governance and the role of the company secretary? The corporate governance of a company has long been considered a factor in D&O Insurance premiums with the theory being that companies with better corporate governance have lower D&O premiums. However, we don’t see many questions from insurers focused on corporate governance and studies have shown that D&O Insurers do not directly scrutinise the corporate governance of a listed company. Further, any view of insurers on the corporate governance of a company are not reflected in the premium (though they may be reflected in the deductible/retention).

The important role of the company secretary

Does this mean the corporate governance and the role of the company secretary is irrelevant to director liability? Of course not.

Analysing corporate governance is very difficult for an insurer to do in an objective manner and most listed companies will ‘tick the boxes’ and apply the relevant corporate governance code. So insurers don’t tend to focus on the corporate governance documents that a company has or the codes it follows. However, the same study found that the deductible/retention can be directly impacted by corporate governance and that the premium can be impacted by how corporate governance is dealt with in practice. It even goes on to recommend the publication of D&O premiums by listed companies, as an indicator of the company’s performance in respect of corporate governance.

For the directors as well, the increasing D&O premiums show the increasing likelihood of liability for directors. No insurance cover is perfect and the scope of D&O insurance in the UK is heavily restricted by the Companies Act 2006. Therefore, directors need to consider their own personal liability that may still exist outside the scope of the D&O insurance and this level of liability is undoubtedly increasing.

How corporate governance can help protect directors

To help protect directors and, in particular, non-executive directors, it is critical that there is a clear corporate governance framework that is followed and that proper records of all discussions, decisions and processes are maintained. This means that if there is a claim, there is good evidence of the actions of the directors which they can use to defend themselves. A good company secretary can also help directors to show and evidence all of the different factors they took into account in making their decision.

We have previously written about the role of Independent Non-Executive Directors in the banking sector and the importance of having a well resourced company secretary function for these companies and this is equally true for listed companies, those in the wider financial sector and many companies in the third sector or with varied stakeholders. As well as improving the general governance of the company, a proper company secretary function can help protect the directors from future claims and should be considered as part of any D&O risk mitigation regime.

 

Elemental provides a full range of company secretarial services, including board support and corporate governance advice. If you would like to discuss our services, please do get in touch with one of our experts.

Nick Lindsay
nick.lindsay@elementalcosec.com
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