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D&O: A liability for Indian underwriters? (Chartered Insurance Institute Blog:, 10 March 2017).

Jun 7, 2017

A liability for Indian underwriters?

The recent Tata boardroom tussle suggests just one thing – there are no holy cows in the Indian corporate governance space. The House of Tata, now nearing 150 years vintage, is the most iconic and revered of all business houses, with a global footprint producing anything from salt to software.  The dispute arose from some alleged serious differences in corporate values – the business recently decided to send home its group chairman rather unceremoniously.

Suddenly, the crossfire between the two camps has drawn the low profile group into the spotlight and media glare like never before. Not for anything unethical but for reasons of summary dismissal of the chair and resultant “breach of corporate governance” protocol, as prescribed under the Companies Act 2013. The ensuing legal battles-to-be do not bode too well for the state of D&O liability underwriting in this market. So, let’s take a look at the growing minefield in the fiduciary space and identify the factors that make it a ticking timebomb.

Tata versus Satyam

Ironically, the friction at Tata high command only generated heat in the form of corporate governance violation allegations – there is no breach of legal duty or a criminal act as in the case of, say, Satyam Computers. Satyam triggered at a time when there was no recourse to class action under the Indian law. That came in with the Companies Act 2013. So while overseas shareholders could bring a class action against the board of Satyam Computers, Indian shareholders were left high and dry. Now however, there has been much speculation as to whether the Tata troubles could invite a class action from aggrieved shareholders. Not too long ago, Nestlé India was investigated for alleged quality issues with its noodles. Interestingly, the proposed call to bring a class action came from the ministry of corporate affairs.

While it may be history now, the fact remains that with its common law jurisdiction, India is witnessing the rise of tort. The growing legalese could not have timed its arrival any better than now, just when the D&O product has been literally commoditised. It is something that neither bodes well for insurers nor buyers.

The minefield

The Bombay Stock Exchange is Asia’s oldest bourse and, after the US, India has the largest number of listed companies. However, the D&O cover is not mandatory nor do all listed companies choose to protect their boards with it. The book still looks profitable for various reasons, despite growing claims activity. Typically, the long-tail class takes time to develop and in any case, the Indian legal system operates at its own slow pace. Questionable reserving may be another factor not conveying the full story, as yet.

Multiple triggers sit inside the Indian book. It can make a long list including: a relatively high component of US exposure; domestic employment practices; prospects of class action; questionable independence of independent directors; board diversity (parochial boards and lack of women directors); failure to match mandated corporate social responsibility targets; endemic corruption; ramifications of the recently introduced insolvency and bankruptcy act; a hawkeyed Competition Commission of India; and internal disruptive forces – most recent being demonetisation. Let us also remember the growing cyber exposure to the fiduciary, owing to the push towards a cashless digital economy. Moreover, relative to the rest of Asia-Pacific, many big Indian corporates buy a much higher cover limit.

What remains to be seen is how these undercurrents will tango with the ongoing advent of new reinsurance capacity, in the form of branch operations of international reinsurers and Lloyd’s. As with all other long-tail class offerings, the question is whether this would have an overall sobering effect thanks to underwriting controls, or if it will lead to further softening and correct only once the ticking timebomb does finally go off.

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