PIMFA
D&O risks to watch in 2024
Businesses face an array of social, political, and economic challenges in the current market. If you’re a director or an officer, this is likely to bring additional scrutiny from stakeholders and investors and raises the risk of potential litigation.
Below, we’ve summarised the main emerging risks for directors and officers in 2024, and the consequences from an insurance perspective. However, action can be taken to ensure that your insurance programme continues to provide appropriate balance sheet protection for the organisation, and personal asset protection for key individuals involved in the running of the business.
Insolvency risk
 High energy costs, declining corporate revenue, lower pricing power, and weaker global demand have all led to a rise in registered company insolvencies in England and Wales. In November 2023, insolvencies were 21% higher than the same month in 2022, according to the UK’s Insolvency Service. Globally, business insolvencies are set to increase by 10% in 2024 according to Allianz.
Corporate liquidity positions are worsening and unlikely to improve before 2025, with a lack of available fresh capital. Coupled with a series of interest rate hikes in many major economies around the world, your business will likely need to preserve cash. In this climate, investors are watching directors and officers closely. If they suspect wrongdoing, they may consider bringing lawsuits against management.
To mitigate potential litigation, businesses need to monitor the accompanying risk. For example, ensure that you have appropriate governance processes in place to reflect the rapidly changing geopolitical environment. Violations of sanctions regimes can result in administrative penalties, criminal proceedings, and securities claims. Businesses that have expanded rapidly in recent years should confirm they have governance processes in place which are appropriate for their size.
Regulatory disclosures
 Regulators and investors have been increasing scrutiny over companies’ environmental, social, and governance (ESG) disclosures. Currently, disclosure laws differ according to jurisdictions, but the IFRS Sustainability Disclosure Standards (IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures) are increasingly becoming the standard for sustainability reporting.
The Corporate Sustainability Reporting Directive (CSRD) also entered into force in Europe in January 2023, strengthening the rules concerning the social and environmental information that companies have to disclose. A broader set of large companies, as well as listed small and medium-sized enterprises (SMEs) will now be required to report on sustainability.
Disclosure rules will place more scrutiny on information released by directors, officers, and the companies they serve. Stakeholders and regulators may decide to challenge certain disclosures, potentially leading to regulatory investigations and proceedings, criminal proceedings, and civil actions, including security claims and derivative actions.
To monitor the heightened risk that comes with such disclosures, it is imperative that you review your current D&O insurance programmes. When it comes to ESG and cyber risks for example, it is key to ensure that certain potentially problematic exclusions are either eliminated entirely or narrowed if elimination is not possible.
Emerging risks
 Artificial Intelligence (AI) continues to reshape business processes, introducing new risks. From a D&O liability perspective, it will present new vulnerabilities you will need to disclose to insurers if you are incorporating AI into your business.
For example, integrating AI into your existing systems may add new entry points for cyber criminals. AI tools may also create incorrect output if the data it was trained on is biased. Essentially, while it grows in prominence and importance and can be a particularly useful tool, the previously unknown risks need to be declared and mitigated against.
What’s more, criminals may use AI to create synthetic text, audio, and video to scale targeted phishing campaigns. Due to the relative unknown risks that come with the rise in AI prominence and importance, there is a chance that directors and officers may overstate or understate the risks, challenges, and opportunities of AI.
If you want to find out more, please watch the replay of our recent D&O webinar here, or visit the Lockton Management Liability page. Alternatively, please contact:
Michael Lea, Partner & Head of Management Liability, Lockton
Laura Skaanild, Head of Global Financial Institutions, Lockton
