In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for restructuring and insolvency.
Key developments in 2022
Corporate insolvencies have been rising sharply in 2022 albeit against the backdrop of record low insolvency filings during the pandemic. By June, they had reached their highest quarterly level since 2009 and the depths of the global financial crisis.
The uptick in insolvency filings follows the gradual withdrawal of the Government's COVID stimulus and support packages, including the restrictions that had previously been imposed upon creditors from issuing winding-up petitions. The last of these restrictions expired on 31 March 2022.
Unfortunately, it now seems likely that this upward trend in insolvencies will continue in 2023. The Bank of England is predicting that the UK faces its longest recession since records began. Many companies are facing multiple challenges all at once, just as they are seeking to bounce back from the effects of the COVID pandemic creating a 'perfect storm', of increased costs, higher energy prices, supply chain disruption, employee shortages, low consumer spending and the prospect of higher debt service levels as a result of rising interest rates.
In a survey undertaken by the Office for National Statistics in August 2022, more than one in ten businesses reported a moderate to severe risk of insolvency. Whilst this figure is lower than that recorded at the start of 2021, it illustrates that there remains a considerable perceived risk of insolvency amongst the management of a significant proportion of UK businesses.
What to look out for in 2023
It appears that 2023 will be a challenging year for many UK businesses. Insurers and their brokers will need to consider carefully how best to mitigate this and deal with the impact of the projected slow-down in the UK economy.
More insolvencies are likely to lead to an increased risk of D&O cover being triggered. This is because once appointed, insolvency practitioners have a statutory duty to investigate the circumstances leading up to the insolvency of a company, including examining the conduct of the directors and transactions entered into in the period prior to insolvency. With the lifting of the temporary suspension of the wrongful trading rules on 1 July 2021, the risk of directors being found liable, and their D&O policies being engaged, is now even greater.
Business interruption and events insurance policies are also likely to be at greater risk of being called upon as companies face increasing levels of financial distress. The premiums for such policies, as well as for D&O policies, may increase as a result.
Insurance matters can also feature high up the list of priorities for the insolvency practitioner, who will need to carefully consider the insurance arrangements entered into by the companies over which they are appointed. Claims under insurance policies can be an important asset of an insolvent company, which the officeholder may seek to recover and/or sell to a third party for the benefit of the company's creditors. The officeholder will also need to consider what insurance cover may be needed in respect of the company whilst it is in an insolvency process, particularly if the intention is that the company will continue trading. All of these matters naturally can have important consequences for insurers and reinsurers.