U.S. companies deemed to have superior environmental, social and governance practices will be eligible for improved terms on directors-and-officers liability insurance policies under an initiative by a leading broker.
Marsh McLennan’s MMC 0.68% brokerage unit has teamed with international law firms and four major insurance carriers to recognize corporate clients for strong efforts in the increasingly high-profile areas, including such things as climate-change disclosures and representations, Marsh executives said.
Directors-and-officers insurance is a core product bought by publicly traded companies. It is designed to protect companies and their individual directors and officers should they get sued by their shareholders.
The law firms, with expertise in ESG litigation and regulation, will review, evaluate and in some instances bolster the ESG programs and policies of Marsh’s clients. Marsh’s brokers will seek coverage for these clients from the four participating carriers, with the goal of obtaining enhanced terms and conditions for those with superior ESG practices.
The participating insurers aren’t offering lower insurance rates to applicants who emerge as the best risks, but the carriers will consider lower deductibles, Marsh said. They also will consider higher limits in certain areas of coverage as well as certain other potential favorable terms and conditions.
A unit of AIG is participating in a program to potentially provide policyholders improved terms on directors-and-officers liability insurance.
Photo: John Marshall Mantel/Zuma Press
The carriers would do their own underwriting as well, to further size up the risk. The enhanced terms would apply to the ESG exposures, not their overall D&O package, Marsh said.
As companies invest in ESG programs, “it is right that those companies that are truly making investments to improve their ESG standing be recognized as a better risk by underwriters,” said Maureen Gorman, a managing director in Marsh’s U.S. financial and professional-lines division.
Shareholder activism and litigation around ESG issues are on the rise, while D&O insurance premiums have risen lately at a double-digit clip.
Insurance units of American International Group Inc., AIG 1.27% Berkshire Hathaway Inc., BRK.B 0.84% Japan-based Sompo International and Zurich North America are participating. Law firms include Norton Rose Fulbright and Orrick, Herrington & Sutcliffe LLP.
D&O policies can cost millions of dollars annually, depending on a company’s size and risk profile, and policyholders often have multimillion-dollar deductibles that they must pay before insurance proceeds are applicable. “It’s not uncommon for a midsize company in today’s market to purchase a $200 million D&O policy with a $5 million deductible for each claim,” Ms. Gorman said.
In recent reports, ratings firms have highlighted the risks facing insurance carriers in getting their pricing right for the coverage. S&P Global Market Intelligence said this month that ESG matters represent “an emerging risk of heavy litigation with which insurers must contend.”
In April, insurance ratings firm A.M. Best Co. cited a surge in lawsuits and the size of jury awards and settlements. Best said corporations could sustain reputational damage over their failure to disclose climate-change risks, or face lawsuits brought by shareholders alleging either corporate inaction to address diversity issues or the failure of boards to act on diversity goals.
How companies disclose and manage ESG issues is drawing more scrutiny from regulators, too. The U.S. Securities and Exchange Commission has said its disclosure rules should be overhauled to include climate risks, and it is figuring out how to make this happen.
Financial services, including insurance, represent a new front line in driving change. In April, BlackRock Inc. said it struck a financing deal with a group of banks that links its lending costs for a $4.4 billion credit facility to achieving certain goals, such as targets for women in senior leadership and Black and Latino employees in its workforce.
Many companies in the U.S. are paying steeply higher rates for D&O insurance, as well as dealing with tougher terms. According to Marsh’s Global Insurance Market Index, while U.S. D&O price increases have slowed, publicly traded companies renewing their policies faced 10% increases in the third quarter compared with the year-earlier quarter.
Marsh expects to launch the product in the U.K. and other countries soon.
Write to Alice Uribe at alice.uribe@wsj.com and Leslie Scism at leslie.scism@wsj.com
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