2023 Management Liability Market Deep Dive

Hello I’m Max, part of the Underwriting Team at Rising Edge. Together, we have come up with our 2023 market Highlights. Here are the top five.

1. Record high levels of corporate insolvencies

Financial strain is a difficult issue for boards to grapple with and can often lead to various types of claims. These include claims from creditors, internal stakeholder disputes, restructurings which involve balancing multiple (and sometimes opposing) interests, employment relations issues, regulatory investigations and enforcement, and others. In England and Wales, the last two quarters saw the highest quarterly insolvency numbers since Q2 2009 and the highest numbers of creditors’ voluntary liquidation since the start of the series in 1960.

2. Weak IPO and capital markets activity

We have observed a prolonged period of reduced IPO activity, particularly in the US, but some stability in the equities markets and signs of interest rates peaking are paving the way for a reopening. Looking ahead, IPO market activity will be heavily dependent on the macroeconomic environment and an improved track record of recent IPO performance. The D&O risks associated with these capital raising mechanisms usually require an increased insurance investment, so their scarcity has contributed to the contraction of London’s D&O premium pool.

3. Coverage issues and disputes that came to the fore following the collapse of FTX

Whilst the lawsuit was recently withdrawn, the FTX case has highlighted the challenges that can arise for both insurers and insureds when multiple executives competing for the pool of funds. There are more than 20 executives being prosecuted in criminal and civil investigations following FTX’s collapse. D&O defence costs are commonly paid on a first come, first served basis, but this case demonstrates the problems that can arise when the lawsuits unfold rapidly, and concurrently. David Friedberg, FTX’s former general counsel, alleged that FTX’s insurers had violated California’s equitable allocation rule by allowing Sam Bankman-Fried (former FTX CEO) to ravage the insurance funds just because his claim came in first. The response from two insurers on the programme has been to leave the court to allocate the funds.

4. Past and present corporate scandals putting the spotlight on Directors and their personal liabilities

We witness corporate scandals every year, and 2023 was no different. What normally follows is a long, drawn-out process of the executives being held personally accountable for their actions, either by regulators or other stakeholders. A noteworthy historical case study in the UK, which came to the fore again in 2023, is Carillion. The construction group went bust in 2018 with almost £7bn in debt on its balance sheet. In 2023, the company’s former finance chief was banned from holding a corporate directorship for 11 years. A number of its former executives have been fined collectively close to £1m, after the FCA provisionally found that they had acted recklessly, and were knowingly concerned with Carillion’s misleading statements regarding its financial performance.

5. Noteworthy developments in SEC rulemaking

In 2023, the SEC adopted rules which requires registrants to disclose “material cybersecurity incidents they experience and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy and governance.” We have already seen the SEC take enforcement action based on perceived breaches of these rules, with the Commission charging SolarWinds and its CISO alleging that they defrauded investors with misstatements that concealed the company’s cybersecurity practices and known risks. Elsewhere, in the climate disclosures space, the SEC has proposed its new rule. There have been repeated delays with respect to implementation, but we expect the final rule to be announced in 2024.

 
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