China D&O inquiries surge as execs face tightened scrutiny

May 14 2020 by InsuranceAsia News Staff

Sales of directors’ and officers’ liability insurance (D&O) in China have surged this year, due to greater regulatory surveillance on companies and its corporate executives.

In 2019, 23 companies listed in Shanghai and Shenzhen bought D&O insurance. As of May 2020, already 72 companies have announced plans to purchase this coverage – a record number, notes a report in the Financial Times (FT).

The protection is intended to shield senior executives from shareholder or customer lawsuits.

“China’s corporate executives are facing significantly higher risks because of the regulatory overhaul. They badly need tools to deal with uncertainties,” noted Jiang Xiangyu, a securities lawyer based in Shanghai, to the FT.

While insurers operating in China are seeing increased inquiries and demand – a Chubb executive said that D&O inquiries from Chinese clients rose by 50% this year – overall they are circumspect about the advantages of such a proposition.

The chief representative of a European insurer operating in Shanghai commented bluntly to the FT: “D&O insurance won’t make a bad company safer.” Policies won’t be written by insurers should they have any suspicion of corporate governance that is not up to par — as D&O coverage in general does not pay out for “intentional malfeasance.”

Chinese companies and their corporate governance have been thrust under intensified scrutiny once again — due to recent high-profile scandals and Beijing’s new securities law introduced in March.

The new regulation is the state reigning in corporate misbehaviour — and means stricter enforcement for corporate disclosure and harsher penalties imposed on companies for wrongdoing such as fraud. The law also allows for investors to come together to hit listed companies with lawsuits.

Luckin Coffee, a well-known Chinese coffee chain seen as ‘China’s Starbucks,’ was recently embroiled in a huge accounting fraud scandal. Records showed that the company fabricated over US$300 million in sales in 2019 — which caused their stock to plummet by around 80%. The chief executive and chief operating officer were subsequently fired.

“Our executives are facing too much risk because of the new security law. We want to relieve their pressure,” said GCL Energy Technology. They have purchased D&O coverage.