Mr. Hendricks, American insurers are suddenly getting involved in executive board appointments. First in the US, but maybe soon here too. They require that their corporate clients, whose directors and officers (D&O) are insurers, have industry experts and not just entrepreneurs on their boards. That sounds surprising and invasive. Why do insurers do this?
Michael Hendricks: The triggers are the two Boeing aircraft accidents with a total of 346 deaths three years ago. After the first plane crashed, management did nothing. Probably due to lack of technical expertise on the part of the board members. No one on the board had that and then the next plane crash happened. That could and should have been avoided. Boeing announced that it would pay the survivors compensation of about 89 million euros. Its insurer, AIG, now requires that Boeing, when renewing its directors’ liability agreements with the company, have industry experts and technical expertise represented on the board from now on.
In plain language: Isn’t it enough if only business graduates control the airline, eg pilots or engineers have to be on the board too?
What really should have happened a long time ago after D&O insurers analyzed claims happens: some bodies, such as boards, supervisory boards and executive boards, have been shown to lack the experts for the respective industry, but whose experience it is essential if you want to ensure the economic success of the company and sometimes have to navigate difficult times.
Especially since management tasks are becoming more complex and top managers sometimes admit behind closed doors that they cannot always foresee all the consequences of their decisions?
This is why you also need industry experts at the top. Because only they can recognize the real risks. Usually, medium-sized companies also have a technical general manager and a commercial general manager.
At Boeing, the comparison between AIG and Boeing is that the Boeing board should have more members with aerospace or safety oversight experience in the future. According to media reports, Boeing has agreed to change its bylaws so that the chairman of the board is an independent director. And the planemaker also wants to hire an ombudsman who will report to the company’s aerospace director, Michael Delaney.
And if there are no senior managers with an engineering background, is there no D&O insurance coverage?
AIG & Co. now has to look at the CVs of top managers before buying D&O insurance. And by individual managers.
This D&O VOV provider initiative already existed here in Germany 20 years ago. But the attempt failed miserably. VOV sent questionnaires to the insured companies and wanted to see the CVs of the directors. But that did not happen, the industrial insurance brokers have already blocked VOV and boycotted the questionnaire campaign and the – in itself sensible – campaign. In hindsight, it now shows that VOV was right.
That is, if the large clinic chains were run solely by business administration graduates and there were no doctors at the top, wrong decisions would be inevitable.
What’s happening in the US today? Will US insurers like AIG, Zurich Versicherung or Axa XL, as international players, also enforce such life verification for top managers in this country? And ask Lufthansa if they have pilots on their supervisory board?
Not only that, it will spread to the other insurance companies operating in Germany. They are all networked around the world and have so-called main insurers who observe and assess the development of D&O claims out of the box with a global dimension. No doubt there will soon be one or more pilots or engineers on the supervisory board who may be responsible for ensuring that air traffic runs smoothly. Unlike most top managers who studied business administration.
When will D&O insurers in Germany ask for the CVs of top managers before insuring the company?
As soon as the competition between D&O providers gets even tougher. As soon as insurers become even more anxious and have even more losses in this line of business and want to assess their risk even better. Board members, managing directors and supervisory boards need to be prepared for this.
On top of that, D&O insurers are suddenly taking a political stance and demanding proof of sustainability from their clients, the keyword being ESG. Which insurers are far ahead and what exactly do they charge? And how do you plan to monitor compliance?
Sustainability has been an issue for insurers for several years. It is not only about environmental concerns and CO² reductions, but about how to guarantee the replacement of tons of paper by electronic insurance policies. Now insurance customers are also in the spotlight. Those dealing with coal and not advocating accelerated phase-out are less insured than companies with a positive environmental orientation that promote sustainability. That is what insurers are now asking for. They have full catalogs of questions, board members have to brief them personally, and only then are insurers willing to give the best possible protection without a lot of exclusions.
Reading note: Invaluable D&O insurance – consequences for companies – hendricks GmbH (hendricks-makler.de)
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