James Cooper, Clyde & Co
21 April 2022

Companies considering their options on D&O captives

Steep rises in directors’ and officers’ insurance has led to growing interest in captives, with up to one in five companies considering using a captive in future, according to WTW.

The consultant’s Directors’ Liability Survey 2022, produced with law firm Clyde & Co,  included new questions on respondents’ use of captives or other alternatives to the commercial D&O insurance markets. It surveyed directors and risk managers based in more than 40 countries across the UK, US, Latin America, Europe, Asia and Australia.

The survey found that 18% of respondents were considering using a captive insurance vehicle for non-indemnified loss (side A) cover, while 20% were doing so for corporate reimbursement (side B) or company securities claims (side C).

Despite this, the actual use of captives remained relatively limited, with only 6% using it for side A and 5% for side B/C. Use of a personal guarantee for directors’ liabilities from the CEO or other major shareholder was more common than captives for either, with 7% having done so.

“Overall, by far, the majority of respondents indicated none of these alternative risk transfer solutions were in place nor under consideration, and this matches our experience in practice,” the report finds. “Nonetheless, it is interesting that a fairly significant number are still considering implementation in the future.”

Technology dominated the risks to directors. Of the top five named by respondents, the most common were cyber attacks, data loss and cyber extortion, ahead of regulatory risks and prosecutions under health and safety or environmental legislation.

“Despite the increased attention on climate change risks following COP26 and recent regulatory changes, it still remains outside the top five risks in any region,” WTW found.

“Foremost in the survey is cyber risk – a multi-varied and ever-evolving risk, with a variety of significant consequences, should an attack occur and data is lost,” said James Cooper, chair of the Global Insurance Practice Group and head of the financial institutions and D&O team at Clyde & Co. “While it is no surprise that cyber attacks and data loss lead the risk ranking once again, the emergence of cyber extortion as a perceived threat adds a further level of pressure on leaders to implement adequate cybersecurity controls and to react efficiently and effectively in the face of an attack.”

The survey also finds a wide range of D&O insurance limits purchased across different regions. In Latin America, 19% bought no D&O insurance compared with a maximum of 8% for respondents across the other areas. Meanwhile, in Europe and North America, 28% and 31%, respectively, purchased €/$100+ million.