Executives face exposure from insolvencies, geopolitical upheaval, artificial intelligence and legal changes next year, according to the Allianz Commercial directors’ and officers’ report.

The annual paper says that while the D&O insurance market has remained competitive for buyers over the past year, loss potential is “still high”.

“The global rise in business insolvencies is a particular focus of concern, with companies and leaders exposed to potential claims from lenders seeking to recover funds, or from shareholders who allege breach of fiduciary duty,” chief underwriting officer Vanessa Maxwell said.

Litigation and enforcement are “increasingly stringent”, she says, and regulatory bodies worldwide are stepping up scrutiny of corporate conduct, making business leaders more vulnerable to investigations, penalties and lawsuits.

The number of major insolvencies rose 26% to 344 in January to September, with 67 in the Asia-Pacific region.

“Rising bankruptcies typically lead to an increase in D&O claims, so this trend is a reminder to business leaders of the need to respond and adapt to the challenging environment,” the Allianz report says. 

Head of global management liability commercial Dan Holloway says higher interest expenses, inflation and economic headwinds “have impacted businesses and resulted in a struggle to service debt loads”.

Businesses in real estate, construction, hospitality, tourism and discretionary non-essential goods are most exposed. 

The turbulent geopolitical environment may lead to supply chain disruption, business interruption, and legal and regulatory scrutiny, the report says.

Companies may draw fire for breaching international sanctions or for failing to manage risks related to politically unstable regions. Leaders can be held accountable for misjudging the impact of geopolitical developments on operations.  

Securities class actions are up 43% in Australia, according to the report.

Allianz global head of financial lines and cyber Jarrod Schlesinger says an annual review is no longer sufficient and D&O policies need to be “responsive to multi-jurisdictional risks and ... provide local coverage for legal defence costs, settlements and other liabilities”.  

Allianz says companies must also adapt quickly to exposures related to the use of artificial intelligence. 

Exaggerated claims about technological capabilities – known as “AI washing” – could lead to securities class action lawsuits and enforcement actions. Such class actions have been filed in the US.

Third-party litigation funding is established in Australia, potentially driving up the number of class actions and settlement costs and damages.

“D&Os will face increasing scrutiny from third parties ready to jump on cases and fund them," Mr Schlesinger said. “Claims are likely to become more complex because of funders' aggressive litigation strategies and the experts they can afford to hire.

“Plaintiffs with little to lose financially could be tempted to make baseless claims. Even if the case doesn’t have legs, directors still have to defend it.”