Directors and Officers: Risks trends and exposures in 2025

After the challenges of high interest rates, double-digit inflation and a pandemic, the UK’s economy is beginning to show signs of improvement. But, while there are some positives, there are new challenges for anyone running a business. 

There are several signs of greater stability.

• Inflation was 3% in January 2025 – higher than the Bank of England’s 2% target but lower than the same point last year. ¹
• Interest rates are also coming down. The Bank of England cut the base rate to 4.50% in February 2025 and further cuts are expected. ²
• The year also started with some good news on the economy as government figures estimated that UK GDP had grown by 0.1% in Q4 of 2024, following no growth in the previous quarter. ³

It’s reassuring to see these signs of improvement but there are still economic challenges ahead. Although inflation is well off its recent peak of 11.1% in October 2022, it’s heading upwards.

Andrew Bailey, governor of the Bank of England, expects it to peak around 3.7% this year before returning to the 2% target ⁴. Higher inflation could temper interest rate cuts too with Bailey saying a ‘gradual and careful approach’ was appropriate.

Even though further cuts are expected, borrowing is still more expensive than before 2020. Refinancing business borrowing from 2019, when the interest rate was 0.75%, could be painful.

Businesses also face a slew of additional costs in 2025. The increase in employer national insurance contribution rate – up from 13.8% to 15.0% in April – coupled with the rise in the National Living Wage and higher business rates has left many business owners wondering how to balance the books.

The Office for Budget Responsibility ⁵ expects firms will pass on 60% of the higher costs of national insurance to workers and consumers via lower wages and higher prices, potentially fuelling inflation as well as resulting in disgruntled employees and redundancies.

UK businesses could also face disruption from overseas. US president Donald Trump is a big supporter of tariffs, threatening to use them wherever he feels trade deals are unfair. This could trigger global trade wars, pushing up costs for UK businesses and even forcing some to rethink their export strategies.

Against this backdrop of additional cost, sluggish growth, and uncertainty, business resilience is being tested to the max.

Figures from The Insolvency Service ⁶ show there were 1,971 registered company insolvencies in England and Wales in January 2025 – 6% higher than in December 2024 and 11% higher than the same month the previous year. It notes that although the number of insolvencies was lower than in 2023, it remains high relative to historical levels.

It’s a bleak picture globally too. Research by Allianz Trade ⁷ points to an 11% increase in global business insolvencies last year, with the figures set to increase by a further 2% in 2025 due to slowing growth, persistent geopolitical frictions, and a delayed easing of financing conditions. This puts more than 1.6 million jobs at risk in Europe and North America alone, with the construction, retail and services sectors most vulnerable.

Forecasts for the UK are slightly more positive. Allianz’s analysts point to a 6% decrease in the number of insolvencies in 2025 and a further 4% reduction in 2026. However, this reduction is tempered by the fact that UK insolvency rates are at very high levels.

Business insolvency brings numerous risks. Business directors and officers risk exposures are heightened leading up to, throughout, and even following bankruptcy proceedings. Just the suggestion that a business may be struggling can increase the risk of litigation as lenders, investors and other parties look to protect their interests.

It can even affect firms that don’t immediately appear to be distressed. Supply chain dynamics mean the failure of a large company increases the risk of a domino effect of insolvencies among its suppliers.

Alongside the more traditional risks of running a business, directors and officers must also horizon scan for emerging threats. One such risk that looms large is artificial intelligence (AI).

Although it’s a potential business game-changer, delivering greater efficiencies and insights, it presents many unknowns. The potential for AI transgressions to trigger legal action, financial penalties and reputational damage means it’s a concern for Directors and Officers underwriters.

Inaccuracy is a key issue. If systems are trained on inaccurate or biased inputs this will be reflected in outputs – including completely fabricated results known as ‘AI hallucinations’.

The data used to train an AI model could also lead to legal action relating to privacy and intellectual property. In the US, the state of Texas secured a $1.4bn settlement with Meta over the unauthorised use of biometric data ⁸. Closer to home, more than 1,000 musicians, including Kate Bush and Damon Albarn, released a silent album in protest at changes to copyright law that would enable AI to use their work without a licence.

AI washing, where a company is seen to be exaggerating its involvement with AI – is another potential headache for directors and officers. As an example, in April 2024, Amazon was accused of AI washing when its “Just Walk Out” technology in its Fresh and Go shops was found to have workers in India manually checking some of the transactions ⁹.  

Legal frameworks are beginning to emerge. The first comprehensive regulation in the EU, the Artificial Intelligence Act, came into force in August 2024, addressing technical aspects of AI safety and its ethical and societal implications. Non-compliance could land a company with a fine of up to €35m or 7% of annual global turnover with the additional risk of follow-on legal action.

In the UK, there is no general statutory regulation of AI just yet, and businesses cannot afford to wait until regulatory framework has been decided upon. AI must be a board-level consideration with everyone understanding AI use cases and benefits and ensuring adequate risk mitigation is in place. Even choosing to ignore it could be seen as a bad business decision, potentially resulting in litigation.

While not a law itself, a briefing paper produced by the UK Parliament's House of Commons Library in August 2023 (CBP9817) has been used as regulation in practice. The research paper covers ethical considerations, data protection, accountability, and transparency in AI systems. Businesses should therefore consider this paper alongside the EU’s Artificial Intelligence Act as guidelines.  

The challenging economic environment coupled with the growing number of risks that businesses face mean Directors and Officers insurance is a key requirement for every board member. Directors are personally liable for their actions, so having a Directors and Officers policy in place could help protect their home and other assets.

Having a Directors and Officers policy in place ensures directors and officers can run a business, whatever challenges come their way.