The Demand for Directors’ and Officers’ Insurance by Large UK Companies

Abstract

This paper investigates why large public companies in the UK purchase liability insurance for their directors and officers (D&O). Previous research suggests that companies may purchase D&O insurance for three reasons: (1) as part of their corporate insurance programme, (2) due to demand from directors, and (3) as part of an optimal governance arrangement. This study tests each of these hypotheses on a sample of large UK companies. The empirical analysis is facilitated by UK legislation obliging companies to disclose the existence of a corporate-funded D&O policy. The empirical analysis finds that insured companies are larger, are more exposed to US litigation, experience greater share price risk, exhibit lower levels of managerial ownership, and possess greater non-executive representation on their boards than uninsured companies. These findings provide some support for all three motivations for possessing D&O insurance but the demands of individual directors and governance seem particularly important.