Money

D&O premiums skyrocket after US lawsuits

By Gao Changxin (China Daily)
Updated: 2011-06-23 13:40

SHANGHAI - The price of directors and officers liability insurance (D&O) in China has gone up more than 20 percent this year, after a series of class-action lawsuits against US-listed Chinese companies pushed up risk-insurance premiums.

That's according to Wei Gang, senior vice-president of Marsh (Beijing) Insurance Brokers Co Ltd, the D&O leader in China by market share.

In some cases, insurance premiums have almost doubled for companies listed or seeking a listing in the US, said Wei.

D&O is a liability insurance that covers legal costs and eventual damages from lawsuits brought because of decisions made by a company's directors and officers.

"We have noticed that the price of D&O has gone up sharply, especially for companies listed or seek a listing in the US," Wei said.

"The rash of class-action lawsuits against US-listed Chinese companies this year have raised the level of supervision of foreign-listed Chinese companies and raised the risk premium of D&O."

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As of Wednesday, 26 US-listed Chinese companies have been sued in the US this year in cases alleging financial fraud, twice as many as in 2010, according to Marsh.

The lawsuits come after a number of independent US investment companies, including Muddy Waters Research, issued a flurry of negative reports on a number of Chinese companies, claiming they were "aggressively committing fraud".

The companies stocks plummeted after the court cases and their managers became potentially legally liable.

Liu Guanwu, an analyst with the consulting firm Analysys International, said since the incidents this year, US regulators and investors have been closely scrutinizing Chinese companies and their managements have become more likely to be targeted in lawsuits.

"Legal proceedings in the US will bring big huge costs to the companies. In recent years, foreign-listed Chinese companies have attached greater importance to D&O as a way to counter the risks," Wei said.

"We think more and more companies will need to buy D&O in the future, as the supervision of Chinese companies gets tighter."

But Wei said he expects the price of D&O will gradually go down when more insurers roll out D&O products that are more profitable.

"Sharp price fluctuations are a common thing in China's D&O market. Once something big happens, the price shoots up, and then it falls as more products are put on the market."