Economic climate: Recent impact on D&O and EPL notifications and claims
Our Financial Lines insurance policies are acutely impacted by broader economic conditions. Healthy, profitable companies have content shareholders, and happy investors are more likely to be hands-off. Conversely, if shareholders lose money, they might be tempted to challenge or blame management – this is where our Directors and Officers (D&O) policies could respond/help.
In parallel, poor economic conditions might result in companies taking the difficult decision to restructure or make redundancies. These processes are fraught with complexity and our Employment Practices Liability policies can help protect our insured companies from the consequences of Employment Tribunal and/or litigation.
The COVID-19 pandemic has caused unprecedented economic change. We expect two waves of impact on our Financial Lines portfolio. The first wave is already evident in the notifications and claims we are seeing submitted, for example, to the Financial Lines’ Mid-Market product suite.
At the beginning of the pandemic we were seeing a consistent flow of notifications, however, these have steadily progressed into late 2020 and early 2021. Across our combined D&O and Corporate Liability policies notifications and claims increased by 55%. Our Employment Practices Liability policies saw a sharper increase of 65%.
These notifications and claims have been received across all the industry sectors we insure including the construction sector, food manufacturing, the charity sector, and professionals such as accountancy firms. This reflects the breadth of the turbulence facing the country, and that the post-COVID 19 economic conditions present a unique challenge for us and the wider market.
Directors and Officers and Corporate Liability Forecast: Debt, Insolvency and “Furlough Fraud”
We predict that trends in D&O and Corporate Liability notifications and claims will be impacted by the large amount of debt that SMEs currently hold. According to British Business Bank statistics, the UK saw an 82% increase in lending to small and medium sized enterprises (SMEs) comparable with the previous year. Data from City UK indicates that by March 2021 there would be £35bn of unsustainable debt owed by UK businesses from government loan schemes, which forms part of the £100bn of total unsustainable liabilities held by UK businesses, and risk that c.800,000 SMEs could face solvency challenges.
Despite this, insolvencies in September 2020 were down by 39% compared to the same month in 2019. We believe the reason for the low rate of insolvency is the UK Government’s support funds made available to SMEs during the pandemic. However, when government support is inevitably removed, several SMEs may be left with substantial debt which would be difficult for them to meet. This is likely to lead to a spike in insolvencies. Insolvencies naturally lead to the actions of directors being questioned, which will in turn lead to a rise in notifications and claims to the Financial Lines’ Mid-Market policy types.
Further, as Government begins to reprioritise long-term sustainable book-keeping, we are likely to see forthright activity and scrutiny from Government and regulatory investigations. For example, we expect HMRC audits and “Furlough Fraud” investigations to increase.
We see the above circumstances as deferring a significant number of D&O and Corporate Liability notifications and claims which we expect to be received in a second wave in the coming months.
Employment Practices Liability Trends: Employment Tribunal, Awards and Settlements
We also expect the future economic climate to impact our Employment Practices Liability products. For example, the Government’s latest quarterly statistics for October to December 2020 show claims to the Employment Tribunal have risen to their highest level since 2013/2014. Single claimant claims were up by 25% and multiple claimant claims were up by 82% on the same quarter in 2019. Statistics for the second quarter of 2020 (June-Sept) also show substantial increases in the overall number of claims being brought.
COVID-19 has also resulted in a sharp increase in the backlog of cases facing the Employment Tribunal which adds complexity to the process and additional legal costs. In October to December 2020 the outstanding caseload rose by 36% for single claimant claims. For the same period, multiple claimant claims outstanding increased by 12%.
We believe awards and settlements are increasing as ex-employees struggle to find alternative employment. This results in the “compensatory award” claimed by the ex-employee – currently capped at £89,493 (or 12 months’ salary if less) – being inflated.
These increases are occurring notwithstanding that the UK Treasury Department extended the Coronavirus Job Retention Scheme (CJRD) – aka “furlough” – to September 2021. When this support is removed we expect to see a wave of company restructuring, changes in terms of employment contracts and redundancy across the UK economy. As a result we expect to see an increase of claims made by employees and ex-employees and thus an increase in notifications and claims in the coming months.
Executive Risk Solutions: A Responsible Choice for Small to Medium Sized Enterprises
In light of the turbulent economic outlook and uncertainty for UK businesses, we offer Executive Risk Solutions policies to UK SMEs that provides cover for unexpected losses. Our policies can be tailored to provide Directors and Officers Liability and Corporate Liability alongside some or all of our Employment Practices Liability, Pension Trustees Liability and Crime coverages, depending on our insured company’s needs.
Our London-based claims teams are committed to providing first rate responses to covered claims. Subject to our policy terms and conditions, we will fund covered defence costs, settlements and damages for actions brought against or insured parties and/or insured companies. We do so using our decades of inhouse expertise and, when necessary, by drawing on Loss Adjusters, our Panel Law Firms, and relevant industry experts.
