Last week, Allianz General Insurance Company (Malaysia) Bhd briefed its senior executives and agents on its newly launched Directors and Officers (D&O) insurance cover — Allianz Protect Platinum — which offers more comprehensive risk coverage to top executives than its existing plans. 

The scheme protects company directors and officers from their exposure to financial and personal risk in their work capacity. With this new product, AGIC hopes to double its premium income in this category this year, as it wants to grow this section of business given the increasing demand for D&O coverage.

Although the contribution of D&O insurance cover to AGIC’s total premium income is small, it shows the growing importance and awareness of the need for such coverage in the wake of several major economic scandals worldwide in recent years.

After Enron Corp collapsed, for example, legal suits were filed against some of its top executives.

In Malaysia, one of the most high profile recent court cases is the civil suit filed by Port Klang Authority (PKA) against its former general manager Datin Paduka O C Phang for breach of duty relating to the Port Klang Free Zone (PKFZ) project.

What is the D&O insurance scheme? It covers mainly errors and wrongful acts committed by directors and officers when conducting company business. It does not extend to criminal liability. The plan helps to protect the executives’ personal assets and meet their legal costs.

The global economic crisis has revealed possible additional exposures the directors and top company executives can have, that not only cover financial institutions but commercial enterprises as well.

This plan is designed to provide additional comfort to directors and senior executives when making complex decisions. Senior executives who are aware that such a plan is in place tend to be more willing to make a full committment to such decision-making, or to take more risk as they can fall back on the insurance cover in the event of any legal action.

The protection D&O insurance provides reduces stress for top executives, thus helping companies to to keep their top talent. It can also help to attract more entrepreneurial directors and professionals to the company, especially if it is on the expansion trail.

In the D&O plan, a wrongful act defines negligence, omission or error in judgement, misstatement, misrepresentation and breach of duty. An error or omission in judgement will lead to bad business decisions. Negligence is about not following proper procedures.

And not only are the top executives covered by the plan, the D&O scheme also helps to ensure that the interests of the company, the board of directors, the shareholders, suppliers, creditors and customers are protected. The plan also provides cover to joint-owner assets that could be at risk because of a wrongful act committed by a bad apple in the organisation.

The two major players providing D&O coverage here are Chartis Malaysia Insurance Bhd (formerly AIG General Insurance (M) Bhd) and ACE Synergy Insurance Bhd, an industry observer says.

Most of the D&O policyholders in the country are multinational companies, large corporations, and listed companies. Hardly any any privately-owned companies — especially small and medium-scale enterprises (SMEs) — purchase D&O cover to properly manage their risk, according to industry players.

Prior to the global economic crisis it was reported that the annual likelihood of directors and officers facing legal suits could rise by 23% in Asia. This number may have increased following the crisis.

The low awareness of D&O insurance among private enterprises here is because there have been few big cases that have impacted a lot of companies. Most of the cases that reach the courts have some criminal element, and in most instances they are settled out of court.

Another factor is the additional costs incurred to buy the insurance plan. But the premium is not high, says an insurance broker, and it is in fact declining, especially in Asia, following an increase in the number of companies purchasing the plan.
The premium depends on the risk profile of the company — the type of business it is involved in, the directors and their experience, the financial results and track record, besides the level of its social responsibility.

AGIC could benefit from the anticipated increased demand for D&O cover with more companies now planning to list on Bursa Malaysia. There is also a demand from public listed companies (PLCs) because they need to comply with the corporate governance requirements of the Malaysian Code of Corporate Governance. The code requires directors, among others, to identify principal risks, have appropriate management, review internal control measures, and to have strategy and succession planning.

Despite the rising number of PLCs owning D&O insurance cover, an insurance player estimates that only about 25% of the total listed entities on the stock exchange are covered, and their assets may be insured for just a fraction of their worth.

With businesses getting more complex, every segment of the company needs to employ professionals and specialists. The board of directors has to rely on these executives to keep them informed about the company’s operations, especially in view of the increasing number of statutory requirements worldwide, such as those relating to environmental and best practices.

With businesses now getting more globalised or cross-border, and if the corporation is listed overseas, the company must follow the rules and legislation of the host country. So having a D&O plan becomes more important.

And the Internet has made obtaining information about a business and its transparency and integrity much easier, so the amount of risk for directors and officers is bound to increase.