China Business Daily (Reporter Ma Wenbo) After 4 years, the arbitration results of the basic layer policy of Luckin Coffee's D&O insurance were released, and the total insurance body paid 7 million US dollars, which made D&O insurance out of the circle again.
In fact, since the beginning of this year, the enthusiasm of listed companies for D&O insurance has continued to rise. In addition, the newly revised Company Law of the People's Republic of China, which will come into effect on July 1 this year, has established a directors' liability insurance system for the first time through legislation.
Industry insiders expect that in the future, mainland D&O insurance may usher in a stage of rapid development.
An insurance advertisement on the streets of Shanghai. (PHOTO COURTESY OF CNSPHOTO)
Luckin D&O insurance is in the spotlight
Four years after the financial fraud case was exposed, the huge D&O insurance purchased by Luckin Coffee before its listing finally had a new trend in claims.
It is reported that before going public in the United States in 2019, Luckin Coffee insured a policy of D&O insurance, with a total insured amount of 25 million US dollars, equivalent to nearly 200 million yuan. In 2020, after the financial fraud of Luckin Coffee was exposed, it filed a claim application with the insurance company.
The D&O insurance policy insured by Luckin Coffee consists of 4 layers of "co-insurance", of which the basic layer is co-insured by 8 Chinese-funded companies, with an insured amount of US$10 million. According to media reports, the basic layer policy entered the arbitration process and has made a ruling, which resulted in a compensation of US$7 million for the co-insured body and a waiver of US$3 million.
Ping An Property & Casualty, as the main underwriting company of the basic layer, has an underwriting share of 30%, and the company adopts a plan of reinsurance of US$1 million and retention of US$2 million. Ping An Property & Casualty said that the company has completed the relevant claims in accordance with the insurance contract and co-insurance agreement.
Enthusiasm for insurance continues to rise
What exactly is D&O insurance that can pay $7 million? What are the responsibilities of the insurer?
D&O insurance, also known as directors, supervisors and senior management liability insurance, is a kind of professional liability insurance that takes the civil liability of directors and senior managers to the company and third parties as the subject of insurance, and is also an important part of the governance of listed companies around the world.
It is understood that the directors' liability insurance is purchased by the company or the company and the directors and senior management personnel, and the insured directors and senior managers are held personally liable for compensation due to accusations of negligence or misconduct in the course of performing the company's management duties (which do not include malice, breach of loyalty duty, intentional false or misleading statements in information disclosure, and violations of the law). The insurer is responsible for indemnifying the director or senior management for the relevant legal expenses incurred in defending the liability and reimbursing the civil liability on behalf of the director.
In the context of policy guidance and the comprehensive registration system to strengthen the main responsibility, D&O insurance has been favored by mainland listed companies in recent years. The reporter combed through the announcements of the Shanghai Stock Exchange and the Shenzhen Stock Exchange and found that as of June 26, 2024, a total of more than 200 listed companies have issued announcements on the purchase of directors, supervisors and senior liability insurance this year, an increase of nearly 50% over the same period last year. Specifically, the amount of D&O insurance to be insured by A-share listed companies is generally concentrated in the range of RMB 50 million to RMB 100 million, and the premiums to be paid vary according to the amount of liability, generally not less than RMB 50,000 and not more than RMB 2 million.
The picture shows a screenshot of the announcement of a listed company on the purchase of D&O liability insurance. (Picture from the announcement of a listed company)
In addition, the newly amended Company Law of the People's Republic of China for the first time encourages companies to take out directors' liability insurance in the form of explicit legislative provisions, and requires the board of directors of the insured company to report to the shareholders' meeting on the relevant content of liability insurance.
Zhang Xuefeng, a financial commentator, told China Business Daily that the newly revised company law establishes a D&O insurance system is a positive reform, which will help improve the corporate governance structure, protect the legitimate rights and interests of company executives, and enhance the stability and healthy development of the capital market. The rising enthusiasm of listed companies for D&O insurance reflects the recognition and demand of enterprises for the new system, and this trend is likely to be further strengthened in the future, bringing a more standardized and stable business environment.
D&O insurance needs to be promoted in a coordinated manner
Although the attention of D&O insurance has increased in recent years, the insurance rate of D&O insurance in China is still relatively low compared with foreign markets. According to industry estimates, the current proportion of A-share listed companies insured by D&O insurance is about 20%, while the D&O insurance rate of listed companies in overseas mature capital markets exceeds 90%.
"No risk, no insurance." Yang Zeyun, a teacher of the Department of Finance of the School of Business of Beijing Union University, told a reporter from China Business Daily that since the introduction of D&O insurance to the mainland in 2002, it has been "thunder and rain", and the main reason is that the civil liability system of directors, supervisors and senior executives is not perfect, and there is almost no liability risk for directors, supervisors and senior executives, and D&O insurance has no market value and market demand. However, in recent years, relevant laws and regulations have clarified the civil liability of directors, supervisors and senior executives, and the risk of civil liability of directors, supervisors and senior executives has increased significantly, and the demand for D&O insurance has increased.
Wu Zhongyan, a researcher at the China Institute of Local Finance, analyzed to the reporter of China Business Daily that from the supply side, there is currently a shortage of D&O insurance supply entities, and only a few insurance companies in China, such as Ping An of China, Chinese People's Insurance Co., Ltd., Huatai Property Insurance, Meiya Property Insurance, and Chang'an Insurance, operate D&O insurance products.
"Product localization, standardization, and personalization are not strong." Wu Zhongyan said that D&O insurance is a foreign product in the mainland, and the D&O insurance clauses currently prevailing in the market are mainly borrowed from the European and American markets, and its policy structure and clause wording are "unsuitable" in the A-share market. At present, the insurance coverage and retrospective period of various insurance companies are different, especially the way of determining "subjective intention" in the exemption clause is very different. In addition, there are also problems such as insufficient product types and guarantee clauses, lengthy and obscure contract texts, and serious lack of pertinence and specialization of risk protection.
From the perspective of policy, Wu Zhongyan believes that the current policy level is mainly "encouragement and support", and there is a lack of specific and operational policy measures. Although individual provinces give a certain percentage of subsidies to listed companies for insurance costs, they can only be regarded as "a few sparks" at best.
In this regard, Wu Zhongyan suggested that government and enterprise insurance should be "three-pronged", strengthen awareness, optimize supply, increase support, and promote the development of D&O insurance at a steady pace. On the demand side, we should re-understand the value and significance of insurance and enhance our willingness to insure.
"The supply side should deepen product and service innovation." Wu Zhongyan said that on the one hand, insurance companies should pay attention to product innovation, improve underwriting capacity building, introduce and cultivate professional talents, and improve and optimize contract design; On the other hand, insurance companies should do a good job of risk reduction and post-event risk treatment services, and rely on third-party service institutions to provide full-process risk management services such as risk consulting, risk prevention, risk mitigation, and post-event claims. The government, regulatory authorities, and industry associations should regularly organize exchange meetings between insurance supply and demand, and local governments can also guide and encourage listed companies to purchase D&O insurance through financial subsidies, so as to turn passive into active and improve the ability of enterprises to resist risks.
"While laws and regulations increase the civil liability of directors, supervisors and senior executives, they also increase the operational risks of D&O insurance." Yang Zeyun believes that relevant laws and regulations have increased the punishment of civil liability for directors, supervisors and senior executives, and the awareness of rights protection and legal awareness of small and medium-sized investors is also rapidly improving. Correspondingly, the civil liability of directors, supervisors and senior executives is also increasing. In addition, D&O insurance also faces certain moral hazards. Therefore, insurance companies need to reduce their own risks by stipulating liability limits, agreeing on deductibles and odds, and reasonably reinsurance and co-insurance.