Spring has sprung and it is time for some spring cleaning. If you are a director, officer, or executive of a public or private organization in South Korea, I recommend that you dust off your Directors & Officers (D&O) liability insurance policy and give it a thorough scouring.
While D&O is managed and purchased by a company or organization, the coverage protects your personal assets from the risk of management liability claims. Accordingly, D&O should be an important part of your family’s wealth risk management plan.
To better protect your wealth and the organization, be sure that your D&O coverage language is up-to-date and that its renewal process is started early so there is adequate time for negotiation and evaluation of coverage options. And to help with your review and planning, below are some key trends to consider:
- D&O liability risk in Korea is increasing due to rising shareholder activism, employment related issues, and new governance and safety regulations.
- The global D&O insurance market has been hardening since early 2020, which means that insurers are seeking and getting higher premiums, higher deductibles, and more restrictive policy language upon policy renewals. Insurers continue to be selective on how they allocate their capital, and we expect this to continue in Korea and abroad. The good news is that premiums are now increasing at a slower rate and some organizations are experiencing flat premium renewals.
- Increasing claim frequency and severity around the world, including Korea, are driving the conservative underwriting approach: event-driven litigation, merger objection lawsuits, securities class-action suits, and employment related issues like harassment, wrongful termination, diversity, discrimination, and work from home practices.
- A lingering effect of Covid are insolvency exclusions that were added to D&O policies when economic uncertainties were peaking. Now that the pandemic is subsiding in Korea and firms can demonstrate that they have weathered the pandemic related financial headwinds, removing these exclusions should be a renewal goal. However, underwriters have still yet to see the full financial fallout caused by Covid so be prepared for an intrusive underwriting process that focuses on the impact of Covid and financial resilience.
- Firms with international operations are experiencing heightened legal exposures due to expanding laws and regulations across the world as well as enhanced cross-border cooperation among regulators. To address this risk, a multinational D&O insurance program needs to be tailored to meet the specific insurance and indemnity regulations in each country of operation.
- Related to #5 above, obtaining D&O coverage in Russia has become complicated as the Russian leadership has enacted a new law that prohibits reinsurance transactions with what it calls “unfriendly states”.
- Underwriters have a heightened focus on ESG issues as proposed climate disclosure rules in the US and other countries will have D&O consequences including deeper ESG questions from underwriters, more securities litigation, and increased D&O cost. Due to pressure from activists and investors, an SEC proposal in the US asks organizations to report their direct greenhouse emissions, indirect emissions from the purchase of electricity or other types of energy, and indirect emissions for upstream and downstream activities in their “value chain”.
- Cyber risk is a major topic with underwriters being concerned about company-wide cyber risk exposure and management’s resiliency actions and response plans. Cyber risk is an ever-evolving risk that can cause a variety of significant consequences to organizations who experience a cyber event. In the US, the SEC recently released new guidelines for board disclosures on cyber risk and risk management. We will be monitoring other country regulators to see if they take a similar approach.
- Directors and officers have much to consider when preparing for an IPO and one key task is securing adequate D&O liability insurance coverage. It is common for D&O insurance policies in Korea to contain an IPO exclusion so this needs to be addressed early in the IPO process and consideration should be given to purchasing higher limits. Alternatively, a stand-alone Prospectus Liability Insurance policy can be purchased so that a separate policy ringfences the high-risk IPO process leaving the organization’s D&O policy limits preserved for its usual day-to-day operations.
- Related to #9 above, there is a very limited number of insurers who are willing to underwrite SPAC IPO risk. Insurers are concerned about the number of “creative SPAC lawsuits” that have already been filed and are raising premiums accordingly. However, new capacity is cautiously entering the market in 2022, so premium rates should begin to plateau, and if a warranty & indemnity (W&I) / representations & warranties (RWI) insurance policy is placed for the SPAC transaction, D&O underwriters view this as a higher level of deal team diligence and sophistication, so will offer more favorable D&O premium pricing.
- Considering the tough market conditions, start D&O renewals early, develop a renewal marketing strategy, and consider seeking quotations from competitive insurers. Preparation is critical, an organization needs to be able to clearly and confidently “sell” its risk to underwriters, so engage experienced advisors to assist with risk advocacy.
- Lastly, keep in mind that all insurance policies are legal contracts, so the words matter and need to be reviewed carefully each year. This is especially true for D&O policies in Korea as the policy wordings vary widely amongst insurers.