The 2023 Public Sector Power Brokers
Many different risks keep business leaders up at night. Some might worry about business revenue or stock performance. Others might have concerns about their property exposures.
Close to the top of that list? Financial lines exposures. Since 2020, management liability exposures have changed substantially. In part, these shifting exposures are the result of the pandemic and the unstable labor market it created.
COVID contributed to layoffs, supply chain issues and employment shortages, though it’s not the only factor leading to an increase in employment practices liability (EPL) exposures. New environmental, sustainability and governance (ESG) regulations and diversity, equity and inclusion risks are prevalent too.
“In 2020, we started seeing a lot of different risk factors that we haven’t seen before,” said Michael Englert, senior vice president and head of private / non-profit Financial Lines at Liberty Mutual. “It’s driven a rethink in how we shape our policies to respond to today’s complex exposures.” Indeed, carriers that listen and respond to the concerns of brokers and clients by creating policies built for today’s evolving risks will be more important than ever.
One of the major EPL risks employers are concerned about in the wake of 2020 is lawsuits over layoffs. Many organizations increased hiring due to labor shortages early in 2021. Now, as fears over a possible economic slowdown linger, many businesses have laid off portions of their workforces.
“They’re trying to right size the organization,” Englert said. “A lot of companies, they went out and they were over-hiring individuals.” With layoffs, companies need to be careful who they fire and who they retain to avoid the perception of discrimination.
Another major management liability risk is the instability of today’s economy. Though business and consumer spending have largely remained resilient in the face of inflation and high interest rates, at some point, interest rates will likely begin to temper economic growth.
“The economy has been so resilient based on all these economic headwinds and interest rates being super high, it doesn’t seem it’s slowing down consumer spending. Is there a point that it’s going to substantially drop?” Englert said. “Probably the biggest exposure, from a D&O perspective, would be a bankruptcy filing.” For that reason, a changing interest rate environment has been top of mind for many management teams.
Beyond these risks, businesses must also worry about the current political climate. It’s no secret that “the world is very divided right now,” Englert said. The polarized political environment we’re currently in could have ripple effects for management liability exposures.
Take diversity, equity and inclusion programs, for instance. Many companies have adopted efforts to hire a more diverse workforce and train employees to be more sensitive, especially in the wake of the racial justice movement of the past few years. But now that the Supreme Court overturned affirmative action, some are wondering whether businesses with DEI hiring initiatives might face similar lawsuits.
“If you have a DEI program, all of a sudden that’s a big exposure that has come under the microscope,” Englert said.
ESG programs are another area of concern. The SEC has once again delayed its rulemaking process regarding ESG disclosures. Now, it plans to implement the rule in spring of this year. When it does, companies could face legal action over their ESG promises.
“You could get sued for representations you’re making. It’s a very different environment now than it was just five years ago,” Englert said.
“The economy has been so resilient based on all these economic headwinds and interest rates being super high, it doesn’t seem it’s slowing down consumer spending. Is there a point that it’s going to substantially drop?”
— Michael Englert, Senior Vice President and Head of Private / Non-Profit Financial Lines at Liberty Mutual
Despite these emerging exposures, management liability rates have softened in recent years. That’s notable when so many other P&C lines have been trapped in a hard market. New entrants to the market have kept prices for D&O and other management liability policies low.
“Right now, there’s an overabundance of capacity, and the market has gotten softer rather quickly, especially in the public space,” Englert said.
Public companies in particular have benefited from increased capacity in the management liability space. Private companies face a few more barriers to getting coverage: They often need more from their carriers, including in-house claims handling.
“On the private side, you really need to be a competent primary market; you’ve got to have in-house claims handling,” Englert said.
As time goes on, it will be interesting to see how new entrants in the management liability market make out. Many don’t have paid claims on their books yet — and claims in this sector “have long tails,” Englert said. “The claim might not settle for 3, 4, 5, 6 years.”
Brokers and carriers are also considering how their policies can respond to some of today’s newest risks. Questions abound about how artificial intelligence (AI) might affect management decisions. While those issues are important and need consideration, many businesses are already seeing AI become a substantial risk in the cyber arena because of its ability to initiate social engineering attacks.
In February, a finance worker in Hong Kong paid criminals $25 million after the attackers used deepfake technology to impersonate the company’s chief financial officer in a video conference call. In this case, the worker did what many cybersecurity trainings teach employees to do, and yet the AI deepfake was too convincing.
The case has left brokers and risk managers rattled. “How do you protect yourself from that?” Englert asked. Companies will need insurance to protect them from social engineering while they develop new cybersecurity protocols that address how criminals are using these nascent — but sophisticated — technologies.
For business leaders who are making employment, financial, governance, and other decisions, management liability coverage is a critical line of defense. In today’s evolving risk environment, brokers and their insureds are seeking carriers who are willing and able to create products tailored to their needs. Liberty Mutual’s new management liability packaged solution, ProShield, is designed to do just that, providing comprehensive and customizable coverage.
“Our goal was to make sure we could develop a solution that checks as many boxes on that list as possible,” Englert said. “We want market-leading, comprehensive coverage that’s also flexible.”
The product was developed after extensive conversations with brokers about the risks for which insureds are seeking coverage. Then, Englert and team incorporated that feedback into its policy. A case in point: the product’s social engineering coverage.
While ProShield is designed to complement cyber policies, it does provide insurance for social engineering attacks, like AI deepfakes. That’s something brokers have been concerned about recently.
“We gather all that feedback to see what’s important to the brokers,” Englert said. “That’s always been our philosophy in shaping our products to client needs. And that work is ongoing—it’s really making the form future-proof,” he added.
To learn more, visit: https://business.libertymutual.com/commercial-solutions/management-liability/
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.