Cost of liability insurance for company directors soars

Ministers and business leaders have raised concerns over the soaring cost of insuring British directors after prices more than doubled in the past year on concerns about corporate governance and pandemic-related claims.

UK government officials are talking with executives in the insurance sector about the rising costs of serving as a director, according to people familiar with the situation, given mounting fears that smaller businesses in particular are struggling to shoulder the burden.

The cost of insurance is set to rise even further, according to executives, given the prospect of new regulations that could make directors personally responsible for the accuracy of financial statements under a forthcoming consultation into audit reform. The government’s plans are due to be published as early as this week.

Companies use directors and officers liability insurance — D&O — to protect managers from claims made against decisions and actions taken as a board.

But company bosses say that the cost for such insurance is becoming prohibitively expensive, with insurers ramping up prices given an expected wave of claims as shareholders and regulators challenge decisions made by companies during the pandemic. 

Jonathan Geldart, director-general of the Institute of Directors, wrote to business secretary Kwasi Kwarteng warning about the spiralling costs of professional indemnity (PI) and D&O cover.

Insurance costs were “having a profound effect on some smaller businesses”, the IoD said. “Cost increases put yet more pressure on businesses and entrepreneurs at a time when, for many, cash flow remains fragile.”

In a reply seen by the FT, Kwarteng told the IoD that he was also concerned and that the government was in “continual dialogue with the insurance sector regarding its response to this unprecedented situation”.

The Treasury, which is the lead department for insurance markets, said it was engaging with the industry “to understand what factors are affecting the availability, or increased premium price, of cover across sectors”.

The average cost of financial and professional insurance has risen 90 per cent over the past year, according to insurance broker Marsh, citing various issues including a Covid-hit economy and rising insolvencies. Within this, D&O prices had seen “triple-digit increases”.

Beth Thurston, UK management liability leader at Marsh, said many clients had seen at least a doubling of the price of their D&O renewal from the previous year. Some insurers have even quit the market.

Thurston said there was an increased prevalence of group litigation in a number of jurisdictions including the UK — similar to the class actions seen in the US — and a rise in “event-driven litigation” from shareholders over decisions by the board. 

“There has been an increased concern of potential exposure for boards regarding their response to the pandemic and an increased concern that the economic shutdown is likely to lead to higher levels of insolvency in areas such as hospitality, retail and aviation,” she said.

Prices are also going up as companies come under greater scrutiny over their accounts — D&O insurance typically covers failure to comply with regulations or laws, reporting errors or misrepresentation, but not fraud.

Insurers defend the higher rates for directors’ and officers’ insurance, given that the business has been lossmaking in recent years because of high claims. But some are concerned that further rate increases could push more companies and directors to bear the risk themselves, rather than buy insurance. 

Such a move could be difficult to reverse, said Andrew Horton, chief executive of Beazley, the insurance company. “We want them still to see insurance as being a valuable product, and we need to ensure that we don’t price ourselves out of it,” he said.

Additional reporting by Ian Smith and Oliver Ralph