Post-Pandemic Shifts Create Risks for Private Company Execs, Certain Business Sectors

Emerging economic, regulatory, and cultural trends pose complex risks for private company directors and officers in the post-pandemic landscape, according to Munich Re.

In the post-pandemic landscape of 2024, the private company management liability insurance market is bracing for new economic challenges, regulatory uncertainty, return-to-office mandates, and shifting workforce culture, all of which pose significant risks to companies and their directors and officers, according to a report by Munich Re.

According to Munich Re, liability trends could add pressure to increase management liability insurance rates, after several years of lower claims activity and new capacity caused rates to decrease during the COVID-19 pandemic.

“For directors & officers insurance, public companies tend to draw more attention and scrutiny, but private companies still face significant risks for their directors and officers. While they are less likely to face securities class actions lawsuits and hefty Securities and Exchange Commission (SEC) fines, private companies, along with their directors and officers are still subject to business litigation, regulatory investigations, and disgruntled investors,” the report noted.

The expiration of government pandemic financial support is revealing underlying business model problems at some companies. Company debt has jumped 18% since 2020, impacting profitability. Amid these economic shifts, vulnerable sectors include commercial real estate, retail and hospitality, and electric vehicles, according to Munich Re.

Areas to Watch

Commercial real estate is facing lower occupancy rates and falling rents while mortgage rates remain high. The national vacancy rate of 18.2% is 60% higher than Q4 2019, forcing companies to compete for rates to attract and retain tenants, according to the report. The national average full-service equivalent listing rate was $37.74 in March 2024, down 1.3% in the last 12 months. This combination of lower demand and falling rents is especially concerning as mortgage interest rates are close to 7%, nearly three times the rates from early 2020, the report stated.
Retail and hospitality are at risk if consumer discretionary spending drops due to rising housing and energy costs. A recent study shows, for example, that spending on clothing and footwear is down 36% year-over-year as of April 2024, the report said. Leisure travel spending has dipped 3.1%, and if housing and utility costs continue to rise at their 11.8% year-over-year rate, problems could lie ahead for this industry that relies on discretionary spending, according to Munich Re.
The electric vehicle market growth is slowing as the ecosystem is not fully ready to support widespread EV adoption, the reinsurer stated. Around the globe, 14 million electric vehicles were registered in 2023, accounting for 18% of all car sales. However, major automakers including Ford, GM, Mercedes-Benz, Volkswagen, Jaguar, Land Rover, and Aston Martin have all announced plans to delay or scale back EV launches. Recent events have shown that the automotive ecosystem isn’t quite ready for an all-electric future, according to the report.

An economic downturn impacting any of these sectors drives up the potential for lawsuits against struggling companies and their directors and officers, the report stated. As companies try to turn around their businesses, they may face increased scrutiny and legal action related to their tactics. These may include merger objection lawsuits, freeze out mergers, breach of fiduciary duty, mismanagement, and bankruptcy lawsuits, per the report.

Regulatory Uncertainty in 2024

The regulatory landscape for businesses in 2024 is uncertain, with several factors potentially impacting the stringency of enforcement and the enactment of new regulations. The outcome of the 2024 presidential election and key Congressional races may determine the direction of regulatory policy in the coming years, with the possibility of regulations being enforced more strictly, new regulations being enacted, or existing regulations being rolled back or eliminated.

Adding to the uncertainty is a recent Supreme Court ruling that could have significant implications for the regulatory environment. I

“Business leaders should pay close attention to the recent Supreme Court ruling in Relentless, Inc. vs the Department of Commerce, which eliminated the Chevron deference doctrine,” as this decision may lead to increased legal challenges to regulations and potentially result in a more lenient regulatory environment, the report stated.

Companies that face regulatory fines or penalties as a result of enforcement actions can suffer negative consequences beyond the financial impact of the fines themselves. Negative publicity surrounding regulatory enforcement can damage a company’s reputation, while significant fines can lead to financial troubles.

Return-to-Office Mandates

As companies look ahead to 2024, a whopping 90% of employers plan to enforce return-to-office mandates, up from only 51% of employers in 2023, Munich re reported. While bringing workers back on-site may boost collaboration and company culture, it also opens the door to potential lawsuits over inconsistent exemptions and perceptions of bias.

Employers will need to tread carefully as they implement these policies. Uneven application of remote work privileges or in-office requirements could spur legal action from employees who feel they have been treated unfairly.

“Perceptions of bias, inconsistent enforcement, or unequal standards can drive legal action, especially if employees perceive gender, racial, or disability bias,” the report noted.

Failure to ensure return-to-office mandates are carried out equitably could lead to an uptick in D&O liability claims and employment practices liability lawsuits, per the report.

Shifting Workforce Culture

As workers return to the office in the post-pandemic era, they bring with them a new set of expectations and sensitivities shaped by recent cultural and generational shifts, according to Munich Re.

The workforce is younger and more socially aware than ever before, with Generation Z, born between 1997 and 2012, making up 15% of the U.S. workforce in 2024. This generation is less religious and more focused on social issues than their predecessors, potentially leading to clashes of opinions with older colleagues, the report states.

The heightened awareness of social issues and personal identity has led to a lower tolerance for inappropriate behavior in the workplace.

“What was once shrugged aside or ignored in pre-pandemic office culture may be less tolerated by younger and more socially aware workers,” the report’s authors note. “This may lead to an increase in employment practices claims (sexual harassment, racial discrimination, ageism, and more) now that more workers are back in the office.”

Leaders who are perceived as allowing an intolerant or discriminatory culture to persist may face D&O claims. When employment practices lawsuits lead to negative publicity and substantial settlements, that can impact a company’s financial performance and valuation, the report adds. Shareholders who experience a drop in their investment value may seek legal recourse from the executive team that failed to address the workplace environment.

Access the full report on Munich Re’s website. &

The R&I Editorial Team can be reached at [email protected].

Vermont’s Future Is Golden

Challenging market conditions are driving insureds to captives. Vermont offers a reliable domicile.

By: State of Vermont | November 21, 2024

Hard markets in commercial insurance lines have been a problem for years now. Many lines don’t show signs of softening, though some, like cyber, have ebbed over the past few years.

High claims volumes and costs have caused carriers to tighten terms and conditions, introduce new exclusions and increase premiums. A variety of different risks are included in this market tightening, and it’s affecting both public and private companies.

As Sandy Bigglestone, deputy commissioner for the State of Vermont’s captive insurance division, explained, schools, churches and other nonprofits are contending carriers are “excluding sexual abuse and molestation from coverage for a lot of these types of entities. These organizations understand the risk and the public needs to have confidence the organizations are addressing the risks, so they must have the coverage.”

Though many commercial lines are affected, property has perhaps been hit the hardest. Increased claims, inaccurate property valuations and other challenges have caused insurers to tighten their books in recent years. 2024’s spate of hurricanes will likely make matters worse.

“There continues to be challenges in the commercial market,” Bigglestone said. “Some companies are coming to us with risks that they say they’ve been self-insuring on their balance sheet, and why not transfer that to a captive to receive greater benefits?”

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.