D&O Insurance and Corporate Governance: Is D&O Insurance Indicative of the Quality of Corporate Governance in a Company?

Abstract

(Practically) all listed companies have Directors & Officers Liability insurance. Literature suggests that D&O insurance and, more in particular, the premium, can be indicative of the quality of corporate governance of a listed company. The idea is that a D&O insurer has an interest in properly identifying the corporate governance of a company and in reflecting this in the premium, since the quality thereof (partially) affects the risk of liability claims against directors and officers. However, a field study shows that D&O insurers in the Netherlands do not scrutinize the corporate governance of a company and that the findings are not or hardly reflected in the premium. The reason for this is that today, most listed companies comply with the corporate governance rules and - more importantly - the corporate governance on paper says relatively little about what the corporate governance of a company is like in actual practice. For this reason, D&O insurers, in their risk assessment, mainly focus on the company’s character and culture. These D&O insurers expect that this for an important part determines how aspects of corporate governance are dealt with in practice. The character and culture of the company will also affect the directors and their actions. As such, the premium does contain a value judgement on the company’s risk profile, thereby giving an indirect signal on the quality of corporate governance. Set against the sum insured and the deductible/retention, which can also give (direct) signals on corporate governance, the premium can provide valuable information to investors and other parties involved. In that case, however, it must be possible to observe and compare the information against data of similar companies and against data on previous policy years. It is, therefore, recommended, partly with a view to the willingness to invest and the growth of capital markets, that listed companies (must) publish basic information on D&O insurance.