Canadian Underwriter

What financial uncertainty may mean for D&O claims

April 12, 2023   by Philip Porado

What's the economic outlook for 2023?

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Private companies, including not-for-profits, face rising legal and other exposures from lenders and private investors, customers and employees that can impact Directors & Officers (D&O) insurance policies.

And, over the past three years, economic volatility has emerged as a key concern. Since 2020, Canadian businesses have faced a brew of economic confusion — supply chain disruptions, pandemic-fuelled labour problems, inflation and related fallout from higher interest rates, and fears of a looming recession.

“Companies are trying to service debt in an increasing interest rate environment, [and] then you have inflationary pressure on the other side,” said Michael O’Connor, assistant vice president of tech/cyber and professional lines at Sovereign Insurance. “So, if they’re manufacturers [that are] making a product, you have supply costs increasing. The combination…causes financial stress on the organization.”

Concerns about underlying economic volatility have underwriters making sure companies are working to strengthen balance sheets in case a long-predicted recession is formally declared, said Catherine Lanctot, senior vice president and national leader of the financial services group at Aon.

Since recessions can lead to layoffs and bankruptcies, insurers are concerned about the employment practices and statutory liability component of D&O policies as well. “On the media and technology side, there’s unfortunately already a bunch of layoffs,” she said. “So, there’s this additional caution.”

Although interest rates have stabilized over the past few months, borrowing costs are higher than they’ve been in a decade, O’Connor noted. “From a loss coverage perspective, on the private side, financial insolvency is our biggest risk. We look at that sort of increased interest rate inflationary pressure as the one thing that could push companies into bankruptcy.”

What’s more, a downturn leading companies to struggle — combined with volatility that’s plagued stock markets since the start of the Ukraine war — could ultimately result in investor losses that spark claims against professional liability insurance (which is often written alongside D&O) held by financial advisors.

“That is top of mind from an underwriting standpoint,” Lanctot said. “When you have an economic slowdown, the first thing people will start looking at is their own statements. And this is where your fund manager, your asset manager…could be the target of claims.”

Meanwhile, navigating the aftermath of COVID-19 has been tricky as insurers work to determine which claims represent emerging long-term trends and which are simply residual from the pandemic.

“In some cases, our claims develop over a period of five to seven years,” said Dane Hambrook, head of specialty products at Zurich. “Most of our clients have resilient balance sheets, but certainly various industries have had challenges over the last two years navigating the various trends in the market.”

Retail and manufacturing businesses continue to have a hard time determining which trends might fade, which have become fully entrenched, and which have blended into new long-term issues.

“If 100% of your business became virtual during the COVID environment…it will normalize [but] the trend curve has shifted upwards, and 30% to 40% of your business may remain virtual,” he said. “What does that do to your employee resource needs as an employer in the Canadian environment? You need fewer people. You need them located in one central location. And the risks associated with that footprint are very different.”


This article is excerpted from one that appeared in the April print edition of Canadian Underwriter. Feature image by