D&O market faces risks due to insolvencies, AI, geopolitics

Securities class actions have risen by 43% year-on-year in Australia.

Directors and officers (D&O) are set to face more volatility in 2025 amidst risks from business insolvencies, geopolitical tensions, climate change, digital transformation, economic uncertainty, shifting public opinion, and an evolving legal landscape, according to an Allianz report.

Although the D&O insurance market has been competitive for buyers over the past year, the loss potential remains high, said Vanessa Maxwell, chief underwriting officer at Allianz Commercial.

The global rise in business insolvencies is particularly concerning, with companies and their leaders increasingly exposed to claims from lenders seeking fund recovery or shareholders alleging breaches of fiduciary duties, she added.

Allianz Trade projects a global increase of 11% in business insolvencies for 2024, with countries accounting for more than half of global GDP experiencing double-digit rises. Major insolvencies have already surged by 26% year-on-year (YoY) during the first three quarters of the year, with Asia Pacific recording 67 cases.

Rising bankruptcies typically lead to an increase in D&O claims, which raises a need for business leaders to respond to the challenging environment, it added.

Dan Holloway, Allianz Commercial's head of global management liability, pointed out that higher interest rates, inflationary pressures, and macroeconomic challenges have strained many companies’ ability to manage debt, leading to heightened D&O claims.

Geopolitical tensions add further layers of liability as issues such as supply chain disruptions, business interruptions, and compliance with international sanctions have placed D&Os under closer scrutiny. Directors can face legal action or penalties for failing to address risks related to politically unstable regions or for misjudging geopolitical impacts on their operations.

Securities class actions have risen, not just in the US, but also in Europe (+10% YoY) and in Australia (+43%). This reflects a heightened litigation risk. 

Jarrod Schlesinger, global head of financial lines and cyber at Allianz Commercial, stressed the need for D&Os to stay updated on geopolitical and regulatory developments more frequently than once a year.

He added that companies require D&O policies that address multi-jurisdictional risks and provide local coverage for defence costs and liabilities.

The rapid adoption of artificial intelligence (AI) also introduces new risks, with misleading claims about AI capabilities, known as "AI washing," could lead to securities class action lawsuits. Companies must adapt to shareholder scrutiny, disclosure requirements, and potential litigation linked to AI-related decisions.

Litigation funding, which is projected to garner nearly 10% compound annual growth rate until 2028, is another driver of D&O claims. Whilst it enhances access to justice, it could also lead to more class actions, higher settlement costs, and aggressive litigation strategies.

In Asia, the D&O market has experienced a decline in overall premium rates in 2024, driven by high competition, excess global capacity, and challenging economic conditions. Some clients have reduced coverage limits to save costs, contributing to rate erosion.

Danielle An, regional practice leader of management liability commercial at Allianz Commercial, noted that the market size for D&O insurance in 2025 is expected to shrink further due to smaller limits, reduced capital market activity, and continued rate pressures.

Despite these challenges, An underscored the essential nature of D&O insurance, given the complex and growing exposures executives face. As claim severity increases, the need for robust coverage remains critical to protecting companies and their leadership against escalating risks.