Macroeconomic issues such as the state of the economy, global conflict and fuel prices have a major influence on the way that businesses perform. And, with higher operating costs and plenty of economic uncertainty in evidence, insurers are watching closely how this affects Directors and Officers claims. 

Economic conditions have been relatively benign in the UK for many years, with the Bank of England able to keep inflation below the 2% target set by the government in the 1990s. This brought stability for prices and wages but also low interest rates to enable business growth.

High inflation is challenging for businesses. As the cost of producing goods or delivering services increases, it can be difficult to set prices. Custom may also dry up as price rises outstrip wage increases. It also pushes up interest rates.

In the UK, 2022 started with the Bank of England base rate at 0.25%, a rate it had held throughout the pandemic. Eight base rate increases were made that year to control inflation, with further ones in February and March 2023 bringing the rate to 4.25%.²

The global picture is equally bleak. Allianz Research expects Eurozone growth to plunge to -0.8% in 2023 due to soaring energy prices, with negative confidence creating a shock on real disposable incomes and corporate margins.

It also expects the US will see a -0.7% fall in GDP, due to rapidly tightening monetary and financial conditions. This is likely to significantly cool the housing market and consumer spending.

As challenging economic conditions fuel insolvencies and Directors and Officers claims, insurers are monitoring these areas closely. The UK is already seeing an uptick in the number of registered company insolvencies, with 1,783 businesses declared insolvent in February 2023.⁴

Allianz research shows that the sectors most at risk of a liquidity and profitability squeeze are: construction, transportation, telecoms, machinery and equipment, retail, household equipment, electronics, automotive and textiles.

To survive, a business must be able to offset higher wage bills, energy and borrowing costs with increases in productivity.