Founded in 2011, the Milliman Risk Institute provides scientific-based thought leadership on all facets of enterprise risk management (ERM). Composed of senior risk executives, actuaries, and university professors, the Milliman Risk Institute Advisory Board meets semiannually to discuss ERM trends, research, and key topics.
In this blog series, members of the Milliman Risk Institute Advisory Board share their views on ERM research and development and how it can support business insight.
If I were to pick a single area of enterprise risk management (ERM) to focus on now, I would look at the regulatory world, especially directors and officers (D&O) exposures. Government authorities have changed their focus to hold public sector executives accountable.
For example, both the U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) recently announced initiatives to more frequently investigate and prosecute civil and criminal charges against the “gate keepers” within public companies. The stated intent of these initiatives is to improve corporate behavior. Those types of claims are uniquely problematic for directors and officers because they are difficult to resolve and threaten both the livelihood and freedom of the targeted executive. Plus, their company may be unwilling or legally unable to indemnify them for their losses in those claims.
As a result, quality D&O insurance coverage is more important today than ever before. D&O insurance policies have become somewhat of a commodity in recent years. There is a lot of competition. If a carrier doesn’t write a policy at a certain rate or with certain terms, customers often leave that carrier and go to a competitor. As a result, it is critically important that directors and officers (through their advisors) identify their preferred coverage terms, which may differ depending on whether those involved are directors or officers. Officers are much more likely than directors to be targets of allegations of egregious wrongdoing, such as fraud or willful violations of law. Consequently, officers want broad coverage for these allegations, subject to a final adjudication that the officer actually committed the egregious wrongdoing. On the other hand, directors (who very rarely are alleged to have committed such egregious wrongdoing) may be more concerned with preserving the insurance policy’s limits of liability for their own benefit than affording broad coverage for alleged egregious wrongdoing by officers. How an insurance program is structured to address these competing concerns frequently depends on who makes the insurance purchasing decisions (i.e., the officers with little or no input from the directors or the officers with considerable input from the directors and their independent advisors).
D&O insurance strategies are part of a company’s overall ERM program. With ERM, we’re not talking about eliminating risk. Risk can be good. What we’re talking about is aligning reasonable risks with corporate strategy. In the D&O insurance context, that means identifying who within the company should be covered to what degree and for what exposures. The existence or lack of certain coverages for a person can affect that person’s behavior, so the structure and terms of a D&O insurance program should be carefully considered from the viewpoint of different insured persons. And directors – not just officers – should have input into those decisions.
Dan Bailey, Esq., chairs the Directors & Officers Liability Practice Group at Bailey Cavalieri LLC. As a nationally recognized expert regarding D&O responsibilities, liabilities, indemnification, insurance, and loss prevention, Dan represents and consults with directors and officers, corporations, insurance companies, and law firms across the country. In October 2015, Dan presented at the Milliman Risk Institute Advisory Board Meeting as a keynote speaker. His remarks were well-received and followed by a robust Q&A session. As part of this blog series, we invited Dan to provide some additional commentary to his speech and share his views on trending topics in ERM.