The growth of D&O liability insurance in India

The Indian economy is growing at a rapid rate, and its society is evolving both culturally and technologically. One engine driving this growth is the culture of entrepreneurship in the country, leading to a high number of new companies being established. One area of corporate leadership not well understood by many in corporate leadership roles, however, is the risk landscape facing company owners and directors based on the decisions they make on behalf of the company.

Understanding the Risk

Directors, officers, and owners of companies can make business decisions that negatively impact other parties, make misstatements that lead to legal suits, and be prone to employee harassment cases. It is high time that company leaders understand these risks and protect themselves against potential financial losses by securing D&O insurance coverage.

D&O, or directors and officers, insurance provides coverage for the personal liability of corporate officers in the event they are sued due to any wrongful acts in their position of responsibility. Lawsuits targeting these corporate leaders can result from cases of fraud, employee harassment, conflicts of interest, and more.

As more companies are established, it is crucial for owners and others in positions of responsibility to protect themselves against potential financial losses resulting from wrongful acts. In scenarios like these, D&O insurance is a valuable tool to mitigate financial losses.

D&O Insurance Trends in the Indian Market

On October 1st, 2018, the Securities and Exchange Board of India (SEBI) issued a regulation stating that the top 500 listed entities by market capitalization, calculated as of March 31st of the preceding financial year, must secure D&O insurance coverage for all independent directors. Since then, insurance companies offering D&O coverage have seen an increase in demand for these policies. One carrier in India reported a premium increase, specifically for D&O, of 70-80% over the last 2 to 3 years.

While mandating coverage for the top 500 companies is a good first step it is insufficient to address the true need in a growing economy. Per the annual report of the Department of Corporate Affairs, Government of India, there are a total of 1.4 million active companies in India as of 2021. With those numbers, India undoubtedly has a long way to go. 

D&O Insurance Market Size in India vs. Others

According to IRDAI, any line of business contributing more than 5% of the total premium needs to be reported separately for premium numbers. However, D&O insurance is still not reported separately by any Indian insurance companies. The premium for D&O is mostly classified under the "other liability" segment in public disclosures of insurance companies. IRDAI should mandate premium and loss ratio reporting for all insurance lines/products separately, irrespective of the premium size. This will enable targeted analysis for individual business lines.

The exact premium size of the D&O insurance segment is not available yet. However, an increase in total liability premium (product, public, & other liability) has been observed over the last three years (FY 18-19 till FY 21-22) as calculated from public disclosures.

If 10% of the total liability premium is assumed to be from D&O, the premium size must be in the range of 30-40 crores (INR), which is around 4-5 M USD. In the U.S., unquestionably a more developed insurance market, D&O premium accounts for 8-10 B USD (per Statista numbers). The Chinese D&O market also has yet to reach the scale of the U.S. market, but it is ahead of India. However, the Chinese regulatory body recently introduced new laws and penalties to increase the number of D&O policies in the country.

Opportunities for Indian Market and Economy

D&O coverage is an essential factor for ensuring the financial stability of any business organization. It provides a protective environment where sound decisions can be made, thereby strengthening the business and the economy of the region.

As regulatory bodies amend the rules in the future, the probability of government-enforced actions can be expected to increase. Legal expenses to fight against government actions can be extremely high, but D&O insurance can help cover such scenarios. Having the right D&O coverage can also help in attracting talented board members.

One evolving risk companies face, and that has a clear D&O impact, is cybersecurity. Data and information protection is a critical risk exposure for companies and a crucial responsibility of a company's board.  

Technology can play a vital role in underwriting D&O risks by developing a pricing mechanism. Since financial assessment is one of the key parameters in pricing, alongside past litigation records, assessing the data security parameters of an organization will become easier through technology. Further, as the nature of cyber threats will change with AI, pricing application updates will be easier to enforce. As threats expand, corporate officers need to ensure they are addressing the risks in a timely fashion and secure D&O coverage to protect themselves in the event something goes wrong.

Directors and officers liability insurance is becoming increasingly important for businesses operating in India. With the country's economy growing at a rapid pace, the risk landscape for companies and their personnel are evolving as well. As businesses face new challenges, insurance companies need to offer innovative products and leverage technology to underwrite D&O risks effectively. By offering comprehensive D&O coverage, businesses can achieve greater financial stability and make sound decisions, contributing to the growth of the Indian economy.

The article is attributed to Kamayani Upadhyay, AVP- Corporate Development, Xceedance