Governance, regulation risks pose varied threats to organisations

Published on Wed, 08/07/2020 - 16:46

Organisations face extremely turbulent times, both economically and geopolitically. Risks in relation to governance, laws and regulation continue to raise a significant level of concern for risk professionals and their organisations.

By Christopher Magee, Head of Commercial D&O, AIG

Digital focus increases

Compliance with evolving digital regulations continues to be among the top risks of concern to risk professionals over the medium term, and ties in with the overall importance of the cyber and technology megatrend. Data protection and privacy have been areas of high concern for boards for a while now, with recently introduced General Data Protection Regulation (GDPR) already resulting in significant public fines.

Good cyber security governance is essential in reducing potential D&O liability. AIG supports the educational initiatives of the Internet Security Alliance (ISA) in producing cyber security practical handbooks and toolkits for Boards in the UK and most recently Europe.

D&O liability - perceptions versus reality

We see through our D&O claims notifications that scrutiny of the decisions made by directors and officers is intensifying. But one of the interesting findings in Airmic's survey is that heightening shareholder litigation risk was of lesser concern to respondents than their corporate governance and regulatory-related exposures. This is surprising in today's economic environment and shines a light on the differences in individual perceptions versus the reality of D&O liability risk for even the best managers of the best-run companies ('it couldn't happen to us'). More and more corporate boards are being forced to defend themselves and their companies from a growing range of allegations involving matters such as bribery, corruption, sanctions, regulatory breaches and cyber security. New issues and exposures have also recently emerged, informed by movements such as #MeToo.

Whilst the current environment may distract from these risks, they continue to have material implications for boards and risk professionals. 

It is insolvency risk - which is one of the most fundamental reasons why companies buy D&O insurance - that is perhaps most likely to confront many companies as the 2020 global economic downturn deepens.

What can risk professionals do?

Corporate risk professionals need to have an acute understanding of the types of D&O products they buy, the carriers they buy them from, how much they buy and, ultimately, how they expect that insurance to respond in the event of a claim. All too often these decisions are reflected upon in times of crisis in situations where time is of the essence, instead of at point of purchase.

The directors whom the policy covers should be fully involved in the risk strategy and risk management process of the organisation. Sense checking and stress testing of certain high-risk exposures can also help ERM professionals and their boards identify any potential coverage gaps and obstacles that could arise in an actual claims scenario. For more details see AIG and Airmic's guide to D&O.

The full Airmic survey report, Top risks and megatrends 2020, can be downloaded here.