AIG Sees Boost for U.K. D&O Market From More Assertive Regulation

Closer scrutiny by regulatory authorities is likely to boost the market for directors and officers insurance in the United Kingdom, according to AIG UK Ltd.

Increases in the number of investigations and prosecutions have been influenced by such factors as the strengthening of resources available to agencies and a public demand for enforcement, said Andre Basile, vice president, financial lines for AIG UK.

Basile cited the anger of shareholders and public pledges from the U.K. Financial Services Authority of tougher action against wrongdoing. He pointed to an increase in enforcement activity by the Office of Fair Trading. Basile also noted the creation by the Serious Fraud Office of a unit dedicated to focusing on abuses in London's financial sector.

"Many regulators are encouraging private [legal] actions," Basile said in an interview in his office.

In the past, Basile noted, such a course was not always considered feasible, because an unsuccessful litigant faced the prospect of having to pay the other side's legal costs. But the rise of firms specializing in funding such lawsuits has lessened this fear, he said.

AIG UK recently explored the issue of the effect of tougher regulation on the D&O market in a London seminar on corporate governance. In addition to the Financial Services Authority and the Serious Fraud Office, the seminar also considered the activities of the Health and Safety Executive, which is responsible for workplace safety.

After regulatory enforcement, AIG UK said in a description of a survey conducted at its seminar, "increasing shareholder action and the sharply rising level of insolvencies were seen as the next most significant. Least worrying to the respondents were actions from staff claiming discrimination."

Basile said companies facing the ire of shareholders should be aware that legal costs have risen over the past decade. They should also understand that potential conflicts of interest can increase these costs by necessitating the hiring of a different lawyer for each person who is insured.

Companies should pay close attention to how a policy is likely to work in a crisis, Basile said. During the past 15 years, he said, enhancements have improved D&O policies in response to a more perilous legal environment. But many companies buy the cover as if it were a commodity.

Basile's advice to potential D&O clients would be to look at the cover that is being offered, the record of the insurer in dealing with claims and, only then, at the price.

"Once you start to differentiate," he said, "you realize that the premium savings that you get on the front end won't mean much if the coverage isn't there on the back end."

Insurers are likely to be interested in such factors as the size, location and specific industry of the potential client. "The most difficult aspect to underwrite is corporate governance and how well the directors and officers perform," Basile said.

Basile is less concerned at how often a client's audit committee might meet than by how it manages its business.

"A company can't avoid risk entirely, but they can minimize it," he said. "And a company that can demonstrate that to a D&O insurer is in a much better position than a company that only ticks the boxes."

Basile warned that closer scrutiny by regulators has become an international issue. "One of the real challenges for D&O insurers in the next five years is to be able to provide a global solution for companies that operate worldwide," he said.

AIG UK Ltd. is part of American International Group Inc.