China Officially Launches the Registration-based IPO System: Potential Impact on the D&O Market

On 17 February 2023, China officially launched its registration-based IPO system. This new system replaces the previous approval-based system. In total 165 rules were released, of which 57 were issued by the China Securities Regulatory Commission (CSRC). The new system is expected to have a significant impact on the A-share D&O insurance market in the following ways.

I. There may be a surge of interest in purchasing D&O liability insurance 

One of the primary ways in which the registration-based IPO system is expected to impact the D&O insurance market is by increasing demand for coverage. Under the new system, companies are able to go public more quickly and efficiently, which is expected to lead to more IPOs. As a result, more companies may need to purchase D&O insurance to protect their directors and officers against potential liability.

The increased demand for D&O insurance is also expected to change the exposures of D&O insurers. This is mainly because the new system is expected to encourage more high-tech companies to go public. These companies tend to have higher valuations and face greater risks than traditional companies. Risks could include intellectual property infringement, cybersecurity breaches, and other technology-related issues.

This being the case, directors and officers of high-tech companies may require higher limits of liability coverage, which could lead to higher premiums in the D&O insurance market, particularly for companies with higher valuations and facing greater risks. It is reported that currently there are more than 300 A-share listed companies planning to purchase D&O liability insurance, and it is expected that the interest in purchasing D&O liability insurance may surge in the near future. 

II. The potential for number of claims to increase

Another potential impact of the registration-based IPO system on the D&O insurance market is related to claims trends, which insurers should note. Under the new registration-based system, the responsibility for ensuring that companies are suitable to go public falls entirely on the company itself. This means that if a company goes public and subsequently faces a claim, it may be more difficult for its directors and officers to argue that they were not responsible for the claim.

Consequently, the number of claims against directors and officers may increase, which could drive up premiums in the D&O insurance market. Insurers may need to closely monitor claims trends and adjust their underwriting accordingly to ensure that they are adequately pricing their risks.

III. Strengthened supervision and investor protection

As mentioned above, supervision and investor protection will be strengthened under the registration-based system.

For instance, the China Securities Investor Services Center (CSISC), a non-profit organisation established by the CSRC to protect the rights and interests of small and medium-sized investors, obtained a shareholding of the listed investment consulting company Shanghai DZH and initiated a derivative claim, winning damages totaling CNY 335 million (USD 48.5 million) for securities misrepresentations and the failure of the company to take action against directors responsible for the misrepresentations. 

The success of this case, along with the first securities class action against Kangmei Pharmaceutical, adjudicated in 2021, may encourage more listed companies / directors and officers to maintain D&O liability insurance. These claims are often significant in value. 

We, therefore, anticipate that the financial exposure of directors and officers may continue to rise, which may in turn lead to high demand for D&O insurance cover as well as increasing risks for D&O insurers. As a result, insurers may need to closely monitor claims trends and adjust their underwriting accordingly to ensure that they are adequately pricing their risks.