Corporate Governance and Risk Management: Your Insurance Broker’s Role
Jan 5, 2010
The notorious Enron, Tyco and WorldCom scandals – to name but a few – trailed behind them an unparalleled crisis in corporate governance, here and abroad. In their wake, boardrooms face a quandary over how to fix a system deeply flawed by excessive pay, weak leadership, corrupt analysts, complacent boards, questionable accounting practices, and serious court time.
These are huge headaches not only for corporate stockholders and management, but for the insurance business as well.In the end, it is insurance companies that pick up the pieces and pay the bills for the consequences of corporate malfeasance, most directly in the form of claims against Directors & Officers Liability Insurance policies, or D&O coverage.
D&O insurance is the key component in this scenario, protecting directors and officers of corporations against damages from liability claims arising out of negligence, alleged errors in judgment, breaches of duty, and wrongful acts related to their organizational activities. The policy also covers the corporation for expenses incurred in defending lawsuits arising from alleged wrongful acts.
“The very reason for D&O insurance is that directors and officers of companies can be sued for everything they’ve got,” says Robert Hartwig, chief economist for the New York-based Insurance Information Institute, an industry organization based in New York.
This post-Enron environment is characterized by a crisis of faith and confidence, by extreme scrutiny of corporate affairs, by a push for accountability and reform, and by heightened exposure to litigation. Understandably, then, corporate policyholders and their intermediaries and insurers find themselves in a whole new ball game in the D&O marketplace.
And even before the governance scandals broke, insurance pricing was poised to trend upward over the past two years as the insurance market cycle turned, after an unusual 15-year lull, from hard to soft conditions. This generally and dramatically constricted the market, drove up prices in most lines and drove out market players, at the same time imposing harsher terms and conditions on policyholders. As if that wasn’t bad enough, then came the added burden of the governance crisis in the D&O line, which left brokers to deliver the bad news to their risk management clients – and risk managers themselves to deliver the same bad news to their corporate management.
It all adds up to a brutal environment if you’re looking to cushion your business from these high-profile risks. To cope with these new realities, here’s some advice:
WEATHER THE STORM - Rest assured, there will be a continuance of this unsettled environment in the D&O sector for a while. On the heels of similar increases in 2002, purchasers of directors and officers insurance currently pay nearly 30% more for their coverage, according to a survey from insurance industry consultant Tillinghast-Towers Perrin. In some cases, premiums have soared as much as 300%, multiyear contracts have gone out the window, and tougher deductibles and co-insurance requirements have become standard. This sustained increase in premiums reflects continued concern over high-profile bankruptcies, corporate scandals and D&O lawsuits. There may be a few faint signs of hope out there, even now, but the situation is fragile. Another wave of corporate wrongdoing could easily set us backwards.
MAKE IT BETTER - Meantime, think risk management within a corporate governance framework. First of all, never be blindsided by the unexpected; see to it that that risk managers and business managers in your operation are communicating at all times on all issues. Specific risk management tools and processes are available to help you, programs that take into account organizational cultural factors along with the critical risks and fiduciary responsibilities of directors and officers. It’s critical to understand the forces driving these new governance models, to use them to diagnose and modernize existing programs in your own organization, and to develop risk management tools to improve them.
HIRE THE BEST - Most importantly, find a broker who speaks your language, who understands your business, and who you feel confident will shop the market to your best advantage, who will manage you through the insurance procurement process in the most effective way in this most difficult environment. Remember, when you have the right blend of a knowledgeable broker and a client with a truthful story to tell, there are underwriters out there willing to listen and to take the bet.
MICHAEL WARE, RWCS is a broker with The Mahoney Group, One of the nation’s top 100 brokers by revenue and a Partner of Assurex Global, the world’s largest privately held brokerage group. He can assist you with your current insurance programs and the management and procurement of cost-effective property and casualty insurance, including loss control, cost containment, risk management and safety‐related resources.
Michael Ware, RWCS
The Mahoney Group
6029 S. Rainbow Blvd
Las Vegas, NV 89118
Direct (702) 997-6281