Improving corporate governance throughout the region is becoming ever more important to insurance companies that provide director and officers (D&O) liability insurance, says Ian Faragher, CEO at Chubb in Hong Kong.
The good news is that more companies in Hong Kong are interested in D&O cover, implying that they are ensuring their governance practices are in line with the law. For insurers, the downside to writing more premiums is that their exposures are also increasing. As a result, Chubb and other insurance brokers are helping corporate managers evaluate their exposures to risk and determine to what extent they need insurance, and where an insurance policy makes false economies.
"Corporate governance is in fact our business," Faragher says.
Companies are beginning to view insurance as something more than just a commodity, he adds. "Hong Kong is traditionally the most competitive insurance market in the world," he says. Alongside Singapore, it has also been the regional entry point for global insurance companies, that quickly found expansion to other markets not so easy. The result was a huge concentration of global competitors in one small market, with success devolving to the one that could offer the lowest price.
But over the past year or so, insurers have begun to slowly raise premiums, partly in response to the recent failure in Australia of Heath Insurance Holdings, which wrote long-tail policies (i.e. policies that left the insurer exposed over a long period of time) and experienced sudden claims that forced it under. Competitors such as Chubb tallied their growing exposures in Hong Kong and realized premiums had to be nudged upward.
The September 11 terrorist attacks in America have accelerated this trend. "People now see that catastrophes really can happen," Faragher notes. Companies are looking to transfer as much risk as possible. But September 11 also created the largest reinsurance loss in history. Insurance companies are, therefore, taking a harder look at their own exposures and putting corporate governance issues high on their checklist when deciding what kind of coverage to provide.
"New laws, recent court decisions, shareholder activism, the activities of groups such as non-governmental organizations and environmental lobbies, are all raising the ante by defining more broadly the responsibilities of directors and officers," Faragher says. "Liability suits are increasing and the costs, whether of settlement, a fine or simply defence, are escalating...we obviously have a vested interest in who runs companies and how they are run."