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| Where the buck stops
In today's business world, decision-making has to be fast: there's constant pressure at the top to always get it right. With Directors & Officers (D&O) insurance, managers can be protected if they are sued in relation to the mis-performance of their duties – though not if mis-conduct is intentional | |||
| 4 Aug 2009
: Despite stricter regulatory environments, high-level company personnel – and lower-level too – are still breaking laws, flouting regulations, and defying their own corporate governance standards: not always deliberately, nonetheless, someone at the company has to take ultimate responsibility for corporate wrong-doing – even if they were not directly involved or implicated in it. The buck stops with the directors and officers of the company. "Directors & Officers (D&O) insurance will protect the personal wealth of members of management and supervisory boards in the event they are sued in conjunction with the performance of their duties as they relate to the company," explains Hartmut Mai, global head of Financial Lines at Allianz Global Corporate & Specialty (AGCS). "Management is increasingly being held responsible when things go wrong." No panacea Directors & Officers insurance is not a product that has been spawned by the financial crisis: it has been in existence in the US for the past 30 years. Up to recent times, AIG and Chubb were the market leaders there. Worldwide, UK insurer Lloyds has one-third of the D&O market. The product spread to Europe in the mid-90s to coincide with regulatory bodies introducing stricter codes of responsibility. When wrong-doing – mostly manifested in fraud, forgery, embezzlement and insider trading – affects company profits, shareholders take note: "Most law suits are filed by shareholders," explains Mai. In the US that can take the form of a class action suit. In Germany, the law was changed in 2005 to allow for a small number of people to file a collective suit. However, D&O is not a panacea for all corporate wrong-doing, Mai warns: "We have several exclusions, including exclusions for dishonest and fraudulent or other intentional acts. That is criminal behavior, not something an insurer can or would want to cover." Most policies do provide cover for defense costs – which are only paid if the defendant is found not to have acted intentionally. Mai has sympathy for those at high levels. "In the fast-paced business world, where swift decision-making has become the norm, it is easier than ever before to make mistakes," he says. "It's impossible to get it right all of the time – and in every jurisdiction" – alluding to the fact that directors of global companies are responsible for decisions made in relation to every country they operate in. Increasing global interest The market for D&O and other related Financial Lines products, such as Errors & Omissions, Employment Liability and Professional Indemnity is ripe. Though all is not yet as Mai would like it: "Despite the global interest in D&O insurance as a result of the financial crisis, prices are still relatively low as we are only now emerging from a 5-year soft market cycle," he explains. He anticipates pricing will improve dramatically from the third quarter of this year and into 2010 – perhaps by as much as 100 percent, as already evidenced in some cases. To capitalize on the demand for Financial Lines products in Central Europe, Asia, the Middle East, South Africa and Brazil, AGCS has hired 18 new employees, and it plans to keep up the investment momentum. The Small and Medium Enterprise (SME) business is of particular interest to Mai. "Formerly only the bigger blue chip companies thought about protecting the wealth of their top people," he says, "smaller companies are now seeing the need to do so as well." AGCS' role vis-à-vis its clients and brokers has expanded from a sales to an advisory capacity. "As the regulatory environment changes and gets tougher," Mai explains, "clients appreciate our input into solutions that will protect their top people's assets. It's difficult for companies to keep on top of the constant and complex changes." This article first appeared in the employee magazine "Allianz Journal". |
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