Directors’ and officers’ (D&O) rates in Australia continue to stabilise, aided in part by new capacity, but rising shareholder activism linked to climate causes looms as a new source of concern for insurers, Aon says.

The broker’s latest D&O update says insurers are keenly focused on emerging liabilities related to environmental, social, and governance (ESG) risks.

“Shareholder advocacy groups are becoming increasingly willing to test the court system as means of pursuing climate-related reform,” Aon said in the Q3 market insights report.

“We therefore strongly recommend that insureds clearly articulate the practical application of their governance frameworks to address emerging risks in the presentation of their risk profiles to insurers.

“As the focus on ‘good corporate citizenship’ continues to gather pace, insurers are also seeking to align their underwriting approach with their own organisation’s ESG commitments.”

Aon says it is “notable” that the Australian Securities and Investments Commission has written to several companies to remind them of their statutory obligations in relation to managing and disclosing climate-related risks.

The broker also cites a recent legal opinion from Minter Ellison on the legal risks associated with “greenwashing” as an illustration of the climate pressure facing companies that has D&O insurers paying more attention to this area.

According to Aon, the opinion piece advises that “it is foreseeable that a company (and its directors) could be found to have engaged in misleading or deceptive conduct or other breaches of the law by not having had reasonable grounds to support the express or implied representations contained within its net zero commitment”.

In its outlook for next year, Aon says it anticipates a more stable market environment, with greater capacity opportunities.

“Whilst premiums will continue to face upward pressure, increased competition… will temper insurers’ expectations,” Aon said.

The broker says in the third quarter expanded capacity offerings have become more prevalent, with traditional D&O insurers being pushed to rethink their strategies and engage more flexibly, especially on preferred risks.

D&O rates for public companies continue to face upward pressure but the pace of increase is easing relative to prior periods.

For private companies, upward premium pressure is also softening for preferred risks, with more modest increases being sought.

“While the market is showing signs of stabilisation, we anticipate modest upward pressure on premiums for both public and private companies to continue for the balance of 2021,” Aon said.

Click here to access the report.