So you think you’re covered: the limitations of D&O insurance
The range of risks faced by directors is expanding rapidly in the face of the increased challenges of ESG, tougher and more aggressive regulation, increasing levels of litigiousness, and a more fractious and protectionist international business environment. At the same time the insurance market has responded with higher costs and more restrictive T&Cs as they try to deal with the twin challenges of low and volatile investment returns, increased solvency requirements, and the need to improve underwriting margins.
Directors sit at the interface of these trends – between a rock and a hard place to say the least!
So what can you do to improve this rather gloomy prognosis? Well, here are three suggestions to start with.
Understand your risks
Nowadays boards and directors are very much aware of the necessity of keeping risk in mind as a regular agenda item. However, governance risks are often (relatively) neglected with such a large range of other financial, operational, and reputational risks to consider. The approach for governance risk should be the same as for other risks, and it starts with a comprehensive review of the risks involved and their potential impact on the fund and board. Only in the light of this can you properly assess whether D&O and other risk management arrangements are fit for purpose.
Know how your governance risk management arrangements work and how to access them
This goes beyond knowing who the D&O insurance broker is. Of course, brokers fulfil and important role in the acquisition of cover and will be needed to access it in the event of a claim, but D&O is only one aspect of the protection needed by directors. It is no good discovering shortfalls in cover at the point of a claim, and it is certainly advisably to have independent advice in dealing with the consequences of a claim event. It is worth noting that none of the other parties involved in the risk financing arrangements is fully aligned with the directors’ interests collectively, and even less so individually.
Make sure you have specific expertise available to support and advise
Modern boards do have a wide range of skills and backgrounds but where there is no specific expertise available amongst the directors, it is important to seek expert, independent support and advice. If the board does not have expertise available amongst its members, it should seek it elsewhere. As with any other advice acquisition, it needs to be both independent and have relevant expertise, particularly in the areas of the analysis of governance risk, broker selection and the purchase of D&O, event and claims handling, and general risk advice.
Thorndon is fully focused on the provision of risk management services to the fund director community. Our mission is to make governance safer and facilitate better decision making in the fund industry.