The Effect of D&O (Directors and Officers) Insurance on Managerial Risk Taking

Risk taking in business contributes towards innovation. Yet excessive risk taking is associated with corporate failure. Many authors have analysed the relationship between personal liability rules of managers and excessive risk taking. In this context, previous researchers have often argued that insurance against personal liability of the manager (D&O insurance) would weaken the manager’s incentive to take care.

However, little is known about the workings and effects of D&O insurance. This book analyses how D&O insurance should work ideally and how it currently works in the USA, the UK, the Netherlands and Germany.

It illustrates how D&O insurance threatens – but also benefits – society and the economy. In fact, a properly functioning D&O insurance system can more elegantly incentivize adequate risk taking than for example, direct regulation of managerial activity (e.g. disqualification) or the adoption of harsher liability rules.

This book provides an overview of the implications of D&O insurance, in particular to:

• policy makers who can take concrete reform proposals from this book;
• investors who can increase their returns by using the information on corporate D&O insurance policies;
• creditors who can better estimate their debtor’s default risk by understanding the debtor’s D&O insurance policy; and
• finally, prospective insurers who can learn in depth about the D&O market, the policy design and the D&O risk.