Directors and officers insurance –continued focus on risk

By Andrew Horne, partner, and Nick Frith, senior associate, Minter Ellison Rudd Watts

Company directors are facing increasing challenges. Substantial damages awards in the Mainzeal case, together with a greater presence of litigation funders and an increasing likelihood of class actions are increasing directors’ and their insurers’ risks.

In this article, we discuss our views of four key legal risks facing directors and their insurers in the near future, being: 1. Climate change 2. Securities class action 3. Regulatory 4. Disclosure to insurers CLIMATE CHANGE RISK

Climate change should be top of mind as giving rise to potential legal action against directors.

The Intergovernmental Panel on Climate Change’s recent Special Report on the impacts of global warming of 1.5°C above pre-industrial

December 2019 December 2019 levels has created a large amount of interest in the impact of climate change from a number of angles.

While the focus has largely been on companies and consumer behaviour, there are some clear indicators that directors may be in the firing line of potential plaintiffs in claims for breach of duty arising from the climate impact of the companies they lead. In a recent extra-judicial article, three judges of the New Zealand Supreme Court wrote on Climate Change and the Law and specifically addressed corporate governance and litigation beginning with:

Directors have a duty to consider the ‘best interests’ of the company in all of the colloquium jurisdictions. It remains to be seen how climate change impacts that duty. There have already been cases in Australia and the United Kingdom relying on corporate governance and company law to hold companies to account for their climate impacts and actions. While acknowledging that New Zealand legislation does not have an

equivalent of the UK obligation on directors to consider the impact of the company’s operations on the community and the environment as part of directors' duties to promote the success of the company:

…academics have argued that, taken together, annual reporting obligations and the directors’ duties of care may mean that directors could breach their duty of care by failing to consider and respond to environmental risks that later harm the company. The same arguments could apply in other colloquium jurisdictions. Climate change is no longer simply an ethical issue. As a material financial risk, directors are accountable under care and diligence duties to take account of the financial consequences of climate change and this applies whatever model of corporate governance is subscribed to. Further, the “business judgement rule” would not protect directors where the legal risk stems from inadequate information or lack of inquiry. These comments taken together make it clear that directors ought to be considering their risk profile in respect of potential climate change liability. Insurers will also need to consider the risk of climate change in the Directors and Officers (D&O) context, particularly from the potential class action perspective. SECURITIES CLASS ACTION RISK

In a recent article by Andrew Horne, Marsh, and the Institute of Directors, the authors explored the impact of Australian securities class actions on D&O cover:

The D&O insurance market for publicly listed companies (especially where Company Securities ‘Side C’ cover or Statutory Liability is included) has incurred the greatest scrutiny over the last two to three years. This change has been driven predominantly by the impact of Australian securities class actions claims on insurers’ financial performance, where the losses incurred greatly outweigh the premium pool available and have done so for a number of years.

20 Number of securities class action claims in Australia [SOURCE: MARSH DATA] 15

1999 - 2006 2 per annum (average) 4 per annum (average) 6 per annum (average) 10 per annum (average) 16 per annum (average) 2007 - 2011 2012 - 2016 2017 2018 10 5 0

While class or group actions in New Zealand have been relatively rare, they are on the rise (e.g. actions against Southern Response, James Hardie and the Ministry of Primary Industries). In 2018, the plaintiffs in a group action against the former directors of Feltex obtained a ruling in the Supreme Court that a forecast in a prospectus was untrue, opening the door to substantial claims against the directors.

We see the Court of Appeal’s recent decision in the Ross v Southern Response case (discussed from page 5) is likely to produce a significant rise in class actions in New Zealand, particularly against D&Os, assuming it is not overturned by the Supreme Court. REGULATORY RISK

Directors are well-aware of the increased focus on conduct and culture. In its 2019/2020 Corporate Plan, the Financial Markets Authority (FMA) identified two of three sector activities for banking and insurance: (a) Bank conduct and culture and incentives follow-up (b) Life insurance conduct and culture follow-up The FMA’s focus will clearly remain on the conduct of directors and senior management. Following the review of bank conduct and culture in November 2018, the FMA and the Reserve Bank of New Zealand (RBNZ) said that they would: … be expecting to see much deeper accountability of boards, executives and senior managers. We will be looking for progress and clear evidence of change and want to see this become part of the ethos of all banks in New Zealand. This presents a clear risk for directors and senior management to take into account when assessing their insurance needs. And for insurers when assessing whether, and on what terms and limits, they are prepared to insure against D&O regulatory investigation costs and liabilities.

Continuous disclosure risk also remains top of mind for directors of listed companies. DISCLOSURE TO INSURERS

Directors will need to be vigilant in their disclosures to insurers in the current environment of heightened risk from multiple disparate angles. Close attention should be paid to circumstances that may give rise to claims, to minimise the risk of allegations of late notification. Insurers will also be looking more closely at insureds’ records to determine whether they had knowledge of potential claims prior to the policy years in which claims arise.

Covernote asked insurers about the year that’s been and what might lie ahead. LOOKING BACK... AND AHEAD 2019 IN REVIEW

PAUL SMEATON

SUNCORP NEW ZEALAND CHIEF EXECUTIVE

What has 2019 been like for your business? Suncorp New Zealand has performed extremely well. We’ve experienced strong growth across both our general insurance and life businesses, with our overall performance supported by positive claims outcomes and benign weather. Increased regulatory scrutiny into conduct and culture within financial services was also a big part of 2019. We look forward to understanding more about the new regime and the role we can play to help build confidence in the financial services industry.

What have been the biggest challenges? Trust in our sector is at an all-time low. Collectively, the insurance industry needs to deliver initiatives and front foot changes that enable positive outcomes for New Zealanders. We also need to be more proactive in promoting the benefits and value of independent financial advice.

What’s been the biggest change over the year? I’m very proud of the effort and focus our people have put into addressing the Conduct and Culture review. By year end, Suncorp teams will have completed over 120 actions to strengthen our culture and enhance customer outcomes.

What have you most enjoyed? FY19 has been a record year across the board. Customer satisfaction is up, we’re demonstrating enhanced risk maturity, employee engagement has increased, and Suncorp New Zealand has delivered its strongest profit to date. We’ve achieved these results against the background of the Conduct and Culture Review, which is testament to the strong outcomes focus and passion of everyone on the Suncorp team.

What do you expect to be the biggest trend your business experiences over 2020? I’m picking two key trends for Suncorp. The first is digitisation. We’re looking to automate our more routine, repetitive business processes to boost efficiencies and enhance the customer experience. The second big ticket item for us is around conduct and culture as we focus on building market confidence and community trust.

What’s the biggest opportunity? Increasing customer confidence and trust. Professional codes of conduct are being introduced and we’re working alongside brokers to support their successful transition. I’m excited about the direction of our business. We’re clear on our purpose. Suncorp people come to work to create a better today for our customers. That’s what’s uniting us as we move toward the new year.

What are you most looking forward to? Suncorp’s in a good place. We have achieved great momentum and I’m confident this will enable strong performance across 2020. Digitisation will improve process and cost efficiencies. I want to see Suncorp people continue to grow their skills and unlock value for themselves and our company. We are listening to our customers so we can deliver the financial services they need to support their financial wellbeing in ways that best suits them.

DECLAN MOORE Chief executive and chief customer officer, NZ and Pacific, QBE

What has 2019 been like for your business? Busy. At the start of this year QBE Australia, New Zealand, the Pacific and India joined together to form the Australia Pacific division. As a subset of this, QBE New Zealand and the Pacific operations of Fiji, French Polynesia, New Caledonia, Papua New Guinea, Solomon Islands and Vanuatu formed the ‘sub’ division of New Zealand and the Pacific that I am now lucky enough to lead. The decision to bring together the two important New Zealand and Pacific operations was a strategic one - made in line with the objectives of our broader business strategy and synergies between the New Zealand and Pacific Operations. Contributing to these significant synergies between the New Zealand and Pacific Operations is a shared a shared history with the Pacific. In fact, QBE has been providing insurance in New Zealand and the Pacific countries since opening in the late 1800s (1890 in New Zealand). Ensuring the right strategy and structure was in place is also of course key to our ongoing drive to better meet the needs of our partners and customers. In New Zealand, QBE works exclusively in partnership with intermediaries to provide a comprehensive range of quality insurance products for businesses of all sizes across many of the industries that keep New Zealand running. I arrived a little late to the party in NZ following many of these changes. My first day in QBE’s Auckland office was the 8th August. My first three months have been spent getting to know our people better and meeting with as many of our intermediary partners as possible. Our relationship with our partners is of course key to our success, so really getting to know them has been a significant focus and rewarding experience. For us as a business, we’re again looking at our insights from our partners to help shape our next year and beyond.

What have been the biggest challenges? I have been fortunate to be supported by a strong leadership team, and my transition into this role was ably assisted by Bill Donovan, who generously delayed his retirement in order to ensure a smooth transition. The regulatory environment in New Zealand presents both challenges and opportunities for all financial service participants and we must work hand in hand with government and industry to ensure the best outcomes for our customers and partners. QBE is supportive of the NZ Government’s outlined approach to upcoming regulation in our space, and the majority of specific changes that have emerged from the review process. We are particularly supportive of the move towards a more transparent and customer-focused industry. This aligns with our business strategy and programme of transformation work already in place. Like any significant change the devil will of course be in the detail, so we are keen that appropriate time is given to consult with all interested parties.

What’s been the biggest change over the year? QBE is transforming to become a stronger, simpler, more customer-focused organisation. We’ve seen significant changes across our business as we seek to do this. We have been working hard to simplify our operation and modernise QBE, seeking to achieve everyday brilliance across all our operations through purpose-driven changes to what we do and how we do it. Our goal is to build deep, enduring, commercially viable partnerships.

What have you most enjoyed? There were quite a few highlights, but one that comes to mind is my role as part of a panel discussion at the Kiwi Dads Launch and Photo exhibition. The Kiwi Dads campaign is about normalising fatherhood in the workplace and encouraging conversations between workplaces, men and their families to break down outdated gender stereotypes. There is great alignment with the Kiwi Dads campaign and the new QBE parental leave policy which aims to promote equal access to paid parental leave. We call the QBE New Zealand policy Share the Care. QBE’s Share the Care policy provides 12 weeks of paid parental leave to new parents (irrespective of gender) at QBE New Zealand and aims to make parenting, career breaks and flexible working business as usual for both women and men. We’re really proud of the initiative and believe this is a huge step towards more gender-equality in the workplace and home. Significantly, QBE is the first organisation in New Zealand to adopt a gender-equal, flexible paid parental leave policy and it has already been utilised by several staff.

What do you expect to be the biggest trend your business experiences over 2020? I have already seen, and expect to continue to see, an increasingly strong focus on our customers and meeting their evolving expectations and needs – are they getting value for money, do they understand the cover that they are being offered, and is it fit for purpose? We need to continually ask and answer these questions. This focus will extend across the distribution chain. We’ll see some more disruption across the industry, which is a good thing. Successful disruptors will be those who address the fundamental and emerging customer requirements in innovative ways. This disruption and change is healthy, and QBE must continue to evolve and adapt and pursue innovation ourselves. Importantly, everything QBE is already working towards in our 2021 ambition to become a simpler, stronger and customercentred organisation is providing the foundational capabilities for our future - ensuring a better future for our people, partners and customers.

What’s the biggest opportunity? At the end of the day we are a people business. We have a fantastic team with great expertise, capabilities and future potential.

Our biggest challenges are often our biggest opportunities - leveraging that potential is a challenge we’ll tackle together as we seek achieve great things as a team. As we think about our future and look to find improved ways to grow trust and confidence amongst our customers and partners, we know we must look to deliver more. This means improving our digital and data mining capability, using technology to improve customer experiences and ensuring we are looking ahead to emerging customer needs as the risk landscape changes and we seek to continue to deliver on our purpose. This will come down to our people, our culture and our work with our partners.

What are you most looking forward to?

A couple of weeks ago I was in Singapore for a QBE Global Leadership

Forum. This event is an opportunity for our leaders to come together to think about and start planning for our future – it was inspiring, exciting, and very eye-opening! Globally, we’re building a team and a framework that will see us into the next few years and beyond, and I’m excited to be part of this.

Locally, I’m looking forward to getting to know all my team even better and diving into the rich detail of

our business and partners (I have a love of the detail, a failing I can’t seem to shake). On a personal front, I’m looking forward to seeing even more

of this amazing country. The entire family are participating in a "Wild Auckland" series that takes us all around

Auckland and its environs - we’re off to Tapapakanga this weekend, so can’t wait.

GARRY TAYLOR

EXECUTIVE GENERAL MANAGER, NZI

What has 2019 been like for your business? 2019 has been an extremely successful year for NZI. We celebrated our 160th birthday this year – an achievement we’re all very proud of and a milestone that shows NZI knows the value of legacy and playing the long game. NZI is and will continue to be a people business built on enduring relationships. Our people, out in the market trading and managing key relationships, I believe, are the best in the business. Aside from the birthday celebrations, it’s been a year of consolidation and long-term, sustainable pricing and underwriting decisions. My aspiration at the start of the year was to transition our business from remediation into growth mode and I’m pleased to say we’re on track to achieving sustainable growth and being first in market for quotes, queries and claims. To me, these are the basic tenets of success.

What have been the biggest challenges? In my mind, conduct is the single biggest issue for our industry to understand and come to terms with. It’s a good time to be taking stock, with the Financial Services Legislative Amendment Act that aims to bring more transparency to the industry and looks at changing the way in which advisers and insurers engage with their customers. This is a significant leap forward. It gives the insurance industry a clearer and more objective framework to improve itself against. I’m all for it. How we adapt to the changing climate remains a challenge. In response to the ever-changing environmental risks we’ve seen here in New Zealand and globally, NZI has moved to a riskbased-pricing model. This is because we believe premiums need to reflect the level of risk and costs associated with providing insurance cover, including the cost of reinsurance. Speaking of environmental risks – earthquake capacity in Wellington continues to be front of mind for our team. NZI is proud to offer insurance right across New Zealand, from Cape Reinga to Bluff, and unlike many other insurers, we are not pulling out of Wellington. We do, however, need partnership with our brokers on this for whole of account national spread and not just single account in Wellington. That is the reality. At NZI we are continually working to understand where the opportunities sit within these challenges and always try to make strategic choices based around our future state.

What have you most enjoyed? A key highlight of the last 12 months has been improving our people and culture results. We achieved a significant increase in our employee net promoter score from April last year to September this year.

I believe in a people-first approach to leadership, and my philosophy is that a strong, engaged team that is clear on vision, purpose and customer value proposition, will result in strong partner and financial outcomes. I am extremely proud of this strong people result for NZI and want to continue to build on a culture where people want to come to work and be part of something special. What do you expect to be the biggest trend your business experiences over 2020? The last year has gone fast for me and there has been a lot of change, and I doubt the pace of change will slow down in 2020. The entire insurance landscape is changing and the regulatory environment we are in is under the spotlight. This time last year no one in the insurance industry wanted to talk about conduct, yet now, following the Financial Markets Authority (FMA) and Reserve Bank of New Zealand (RBNZ) report in February and regular press on the topic, everyone is listening and engaging. I believe that engagement will only increase in 2020. Conduct and culture is top of mind at NZI and there is a lot of work going on behind the scenes ensuring transparency, fit for purpose, and a customer-first approach. We are also working closely with our broker partners to understand the inevitable changes that will result. The focus on the customer can only be seen as a positive step for our industry.

What’s the biggest opportunity? It’s important to note that the industry is currently in good shape, but it’s crucial that as a collective we don’t revert and undo all the consolidation work in underwriting and pricing that we’ve put so much effort into. There’s a real opportunity for us to maintain and build on our strong underwriting disciplines and long-term focus, especially as we weave our way through various challenges and/or opportunities such as climate change and culture and conduct. Another opportunity is in advancing our technology, specifically digital claims lodgement. NZI is in a good position when it comes to technology advances as we have a range of skills and capabilities to draw on from our parent company, IAG. This means we can ‘lift and shift’ the advances that are happening with other IAG brands both here in New Zealand and Australia and also with our offshore partners. As always, there will also be opportunities and challenges that we can’t predict. This means new ideas and new ways of working are a given and I’m confident that we have the capability to be agile and develop people into new areas as they arise. It’s an exciting time to be in the insurance industry.

ADRIAN TULLOCH

Managing Director, Vero Liability

What has 2019 been like for your business? It’s been a good year, as at mid-November anyway. Liability lines don’t generally suffer sudden, catastrophic events, so absent that it has been pretty much business as usual, although with some increase in demand for VL capacity as market appetite dictates in some areas (particularly D&O) receded.

What have been the biggest challenges? No really big challenges this year, but getting the message out around statutory liability, health and safety claims and risk management has been a focus, as well as highlighting design and building product risks emerging in the construction sector.

What’s been the biggest change over the year? Probably a notable new focus over the year for the industry is around the learnings coming out of the Hayne Commission in Australia and the Reserve Bank and FMA’s conduct and culture inquiries in New Zealand. Although real change is yet to hit the ground in the general insurance industry, it is clear that there will need to be increased commitment from insurers and brokers to ensuring that insurance buyers get insurance products they understand.

What have you most enjoyed? Enjoyed might not be quite the right word, but I have been very happy to observe the discipline coming into parts of the Lloyds market arising out of Lloyds requirements for syndicates to file realistic business plans.

What do you expect to be the biggest trend your business experiences over 2020? D&O insurance for public companies will continue to be challenging. Customer conduct compliance will be to the fore for all market participants including VL.

What’s the biggest opportunity? The biggest opportunity will continue to be winning and retaining clients by providing great products and great service at reasonable price.

What are you most looking forward to? 2020!