Changes ahead for the Buy Now Pay Later sector: Key implications for Australian FinTechs

Finance

Cries for regulation in the currently self-regulated Buy Now Pay Later (BNPL) sector are nothing new. Financial services providers and consumer rights groups have long expressed concern that these services enable financial overcommitment from vulnerable Australians. But are we reaching a point where the size and scale of these businesses, the emergence of several new market entrants, and the disruption to traditional credit markets is forcing the Government’s and regulators’ hands?  This article looks at the current situation for BNPL FinTechs in Australia, how insurers currently view their risk exposures, and how this may change if regulations are introduced.

 

THE CURRENT STATE OF PLAY

In 2018, digital laybuy platform Afterpay and the BNPL sector avoided regulation when ASIC reported it was not looking to bring them under the National Credit Act. In late 2020, a Senate Committee on Financial Technology and Regulatory Technology backed the BNPL sector’s code of practice, saying self-regulation helped to protect innovation. This code is currently being finalised by The Australian Finance Industry Association (AFIA) in collaboration with its BNPL members. It aims to have the BNPL industry Code of Practice operating by 1 March 2021.

Recently, however, a report provided to the UK’s financial regulator, the FCA, following a review of the unsecured credit market, has made the strongest case yet for implementing regulation within the BNPL sector, at least in the UK.

 

HOW WILL THIS IMPACT THE AUSTRALIAN MARKET?

The BNPL sector is never far from the sights of ASIC, which released an industry update in November 2020. ASIC currently holds Product Intervention Powers (PIP) over BNPL products which provides a regulatory tool to address any significant harm to consumers. Come October 2021, the Design and Distribution Obligations (DDO) legislation will also apply to most ASIC regulated products, which will include BNPL products.

Whether these regulatory controls, complemented by industry self-regulation, will provide consumers sufficient protection without stifling innovation remains to be seen. What is certain, however, is this topic remaining hot for a while yet. According to IBISWorld, the market is predicted to maintain strong growth, with Australian BNPL revenue forecast to grow from AUD 680M (USD 488M) in FY20 to AUD 1.1BN by FY25, with users set to double to 4M within three years.

 

INSURING BNPL FINTECHS IN AUSTRALIA

FinTechs are a blend of technology and financial businesses, exposing them to risks common in both sectors, where insurers’ appetites are commonly limited.

Examples of such risks include:

  • Technology risk – tech failures leading to 1st and 3rd party financial loss
  • Financial and credit risk
  • Financial crime, fraud, and identity risk
  • Cybersecurity and Data Privacy – 1st and 3rd party losses
  • Directors & Officers Liability
  • Public & Products Liability
  • Regulatory Investigations and Statutory Liability
  • Money Laundering risk

Although some do, BNPL FinTechs are not required to hold an Australian Credit Licence (ACL). Thus, in the eyes of insurers, they do not have the same responsibilities and obligations as ACL holders under the National Consumer and Credit Protection Act. This lack of regulation makes insurers nervous, and securing adequate insurance is therefore challenging. It will be interesting to see whether insurers’ risk appetites change if regulation is introduced into the BNPL sector – as recommended in the UK.

 

We’re with you all the way

With significant experience in the financial, technology and FinTech sectors, Honan welcomes the opportunity to assist all businesses operating in this space. Feel free to reach out at any time to discuss your insurance needs. 

 

Dominic Brettell

Head of Client Service – Corporate Insurance & Risk Solutions

dominic.brettell@honan.com.au

 

 

Discover the 4 Risk Protection Essentials for Tech Start-Ups.

Corporate Snapshot: FY21 Q2-Q3

Insurance Updates

In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.

 

KEY TAKEAWAYS FROM FY21: Q2?

Q2 saw a continuation of the hard market which has dominated the past 3 years. Over the December quarter, we saw two distinct approaches to underwriting from overseas/global insurers. The first; a more conservative and selective approach to risk acceptance, especially for new business. The second; a largely ‘business as usual’ play by local insurers who continued to balance growing their books with managing a risk-distributed portfolio. The behaviour of global insurers was largely driven by management reporting, end of year close out, and annual reinsurance treaty negotiations as underwriters looked to limit additional exposure to their portfolios.

In December, insurers again exceeded their top line premium targets as well as deploying their full calendar year capacity. This resulted in greater focus on risk selection, with even tighter terms and conditions applied to policies. Additionally, underwriters were required to obtain referral/management approval prior to the release of terms.  This caused delays, which in many cases resulted in a declinature for terms to be offered.

 

KEY CONSIDERATIONS FOR FY21: Q3?

2021 marks the fourth consecutive year of hard market conditions, albeit with some anticipated softening on underwriters’ pricing for low hazard, vanilla style risks. At the upper end of the rating spectrum, we will continue to see higher rate increases for more hazardous risks, resulting in broader pricing. Well performing businesses are likely to receive higher single figure increases compared to distressed accounts (claims, occupancy, and exposure to natural catastrophe perils), which continue to attract rate increases in excess of 25%.

Despite underwriters continuing to approach natural catastrophes and highly volatile risks with caution, market capacity is set to remain stable for the quarter ahead.

 

WHAT INDUSTRY TRENDS SHOULD CLIENTS MONITOR OVER THE COMING QUARTER?

As Insurers introduce new underwriting guidelines for the calendar year, we will see:

  • withdrawal of certain product classes (such as Professional Indemnity and Excess Liability)
  • introduction of sub-limits for hail and windstorms (previously not sub-limited)
  • complete exclusion for Infectious Disease
  • reduction of % participation, especially where risks are written on a 100% basis.

Insurers are taking these steps in an effort to maintain underlying profitability, especially in response to poor investment returns courtesy of low interest rates. 2021 results are expected to be mixed, contingent on product class and State/Territory frameworks. This will be reflected in upcoming market and regulatory reporting.

The recent Business Interruption test case in NSW in respect to COVID-19 will remain front of mind for insurers, with several undertaking capital raising to bolster balance sheets should Insurer appeals be unsuccessful.    

 

We’re With You All The Way

Feel free to reach out to discuss your risk exposures.

 

Travis Wendt

National Head of Corporate Insurance & Risk Solutions

travis.wendt@honan.com.au 

 

 

Read the FY21 Q2-Q3 Financial Lines Market Update

 

Financial Lines Snapshot: FY21 Q2-Q3

Finance

In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.

The 2020 calendar year was one of the toughest on record for Professional and Executive Risks, with rate increases and capacity reductions continuing to pervade the market, driven fundamentally by large claims reserves.  We do expect pricing to gradually stabilise as insurers reach critical mass in gross written premium, though this will also be heavily reliant on the attraction of new capital to support the market.  Without more capital, pricing will remain elevated and put simply, will be a “supply and demand” problem.

 

KEY TAKEAWAYS FROM FY21: Q2?

Following substantial rate increases, Directors and Officers (D&O) market woes for publicly listed companies continued into FY21 Q2. We witnessed renewal premium uplifts within the vicinity of 150% – 200%, with historically under-priced or distressed accounts receiving as much as 300%.  These increases were primarily driven by an insurer portfolio correction to buffer against the bottleneck of existing class action activity, as well as claims arising from COVID-19.  

Q2 also saw a flurry of insurance activity from initial public offerings (IPOs) in a buoyed market. Buying patterns in the space indicated a growing trend to incorporate standalone public offering insurance into annual D&O programs, with clients even opting to strip out Side C (Entity Securities Cover) due to pricing constraints.

 

KEY CONSIDERATIONS FOR FY21: Q3?

For Q3 FY 21, further rate increases are anticipated given Q3 FY 20 accounts eluded price adjustments associated with COVID-19.  With no signs of abating, this adjustment phase may carry into FY 21 Q4 (albeit not with the same severity we witnessed last year) as programs look to stabilise.

In the wake of COVID-19, most D&O insurers have adopted a “wait and see” approach with respect to writing new business, and have been meticulous in the underwriting process; particularly in terms of company free cash flow, cash runway and debt serviceability.  Conversely, some markets have taken a more active stance in writing new business; bolstering their position in response to more attractive rates and a healthier post-pandemic market.

Pertaining to other product classes, Employment Practices Liability has presented challenges to insurers with an increased incidence of unfair dismissal allegations and higher regulatory burdens for company health safeguards and protections resulting from COVID-19. Higher premium rates, reduction in capacity and considerably decreased take up of new business has followed, and is likely to continue in Q3.

Cyber Security policies have also been affected, given the potential network vulnerabilities exposed while working from home.  The scale and speed of the workforce displacement in 2020 has seen a significant increase in the prevalence of new attacks not previously contemplated with the higher volume of losses translating to higher premiums – another trend to continue in Q3 and another reason why Cyber is considered the number one business risk for company boards.

The Design and Construct Market has also been a focal point against the background of Government stimulus packages. Soaring premiums and limited appetite for risk that have discouraged insurers from offering cover to building certifiers and surveyors are now affecting other professions. Engineers have been severely impacted, and extra work coming from stimulus spending has exposed them to greater risk. Further to this, the NSW Government’s draft regulations for the Design and Building Practitioners Act 2020 has presented difficulties. The new “duty of care” provision in the Act applies “retrospectively” which will likely have serious ramifications for the PI Insurance market; broadening the launching pad from which owners can bring claims.

Now, more than ever, it is important to have a highly skilled and experienced broker to represent such clients in the market.

 

WHAT INDUSTRY TRENDS SHOULD CLIENTS MONITOR OVER THE COMING QUARTER?

There are some bright spots in the insurance market, particularly for D&O. The recent landmark Worley court decision on class actions has sent a powerful signal to boards and directors that they may successfully defend class actions if they can show reasonable steps were taken to determine how decisions were made.  This is an important decision because very few shareholder class actions have progressed to a judgment of the Court on merits.  If there are more decisions of this ilk, where courts are given the opportunity to interpret continuous disclosure provisions and demonstrate the successful application of defences available, we may see a longer-term recovery in the D&O market.

Furthermore, The Parliamentary Joint Committee on Corporations and Financial Services (the Committee) has completed its inquiry into litigation funding and the regulation of the class action industry. Reforms, such as the push to make the easing of the continuous disclosure “director at fault” rules permanent would raise the threshold to lodge claims and aid the D&O market considerably. The reforms (if implemented) will also substantially increase regulatory and judicial oversight of litigation funders and plaintiff firms, and thereby (in theory), reduce the volume of class actions.

 

We’re With You All The Way

Feel free to reach out to discuss your risk exposures.

 

Henry Clark

Head of Professional & Executive Risks

henry.clark@honan.com.au

 

Dennis Moens

Client Manager – Professional & Executive Risks

dennis.moens@honan.com.au

 

 

Find out more about Honan’s Professional & Executive Risk Services.

WA: New Industrial Manslaughter Laws with Important Implications for Businesses

Insurance Updates

In an effort to harmonise the Work Health & Safety (WHS) regimes across Australia, Western Australia has now passed legislation to update its Work Health and Safety Act 2020 (WA), (the Act).

 

Workplace Health & Safety Overhaul

The new laws will likely come into place in April 2021. This will include several changes, with the most notable being the Industrial Manslaughter Legislation:

If a ‘Persons Conducting a Business or Undertaking’ (PCBUs) is engaging in conduct knowing the conduct is likely to cause death “or serious harm” to an individual, the crime will now carry potential imprisonment term for up to 20 years and a fine up to $5,000,000 for an individual person and up to $10,000,000 for a body corporate.

 

Critical Actions for Directors & Officers

Any organisations based in Western Australia should now review their work health and safety procedures to ensure they meet the new legislative requirements.

These new changes are intended to make safety front of mind and help prevent any future fatalities from occurring.

Under the new legislation, it is important to note that officers can also be charged for crimes committed by a PCBU in certain circumstances, including when the PCBU’s conduct was attributable to the officer’s neglect, or engaged in with the officer’s consent or connivance.

Officers (in particular) should ensure they understand their obligations with respect to the PCBU’s WHS duties and officer due diligence.

 

What about Insurance?

Up until now, companies could transfer the risk of these penalties via insurance, however this will now be prohibited going forward. Companies will therefore need to ensure that policies offering WHS Penalties cover are not entered into.

 

We’re with you all the way

To find out more about these changes, feel free to reach out at any time.

 

Dan McCallum

Head of Client Services (WA)

dan.mccallum@honan.com.au

 

 

Learn more about Honan Workplace Risk consulting here.

 

Underinsurance in the Property Market: Do You Have the Right Cover?

Insurance Updates

Uncertainties in the property market brought about by COVID-19 have prompted many home owners to take a detailed look at their insurance policies, often for the first time.  It’s usually not until a disaster occurs (e.g. a fire, storm or cyclone) that people realise they don’t have adequate cover. Underinsurance is an area often overlooked by property owners, but it has the potential to cause severe financial hardship if you need to make a claim. In this article, we’ll explain how this common issue occurs and what you can do to avoid it.

 

WHAT IS UNDERINSURANCE?

According to the Australian Securities and Investments Commission (ASIC), a home is underinsured when the insurance covers less than 90 per cent of the rebuilding costs.  It’s alarming that 1.8 million households don’t have any home insurance at all, according to the Australian Bureau of Statistics, and for those with insurance, 80 per cent don’t have the correct cover, according to the Insurance Council of Australia. This is a significant problem in the event of a claim because you would not be covered for the full cost of a total property rebuild. The following example illustrates the issue:

The Insured has undervalued their property replacement value by 50%. If they suffer a claimable loss, the Insurer can limit the settlement payable under the policy.

Full Replacement Value of your property = $1,000,000
Sum Insured under your policy = $500,000
Value of claim = $100,000
Amount payable by the insurer as a result of the application of the ‘Average’/’Co-Insurance’ clause (i.e. 50%) = $50,000

 

 WHY IS UNDERINSURANCE SO COMMON?

For most policy holders, this issue stems from a lack of information, rather than an intentional reduction in cover to save money on their premium. One of the most common causes of underinsurance is inaccurate building sum insured estimations, based on incorrect information such as initial building costs or using the market value of the property. For example, many insurance policy holders neglect to estimate on all components that are required when rebuilding a house. Often, the estimations do not consider the higher cost of building materials when compared with the original build and the additional services required for a total rebuild, including demolition costs and architectural fees.

 

HOW CAN WE HELP?

Whether you have an existing policy, or you are looking to secure insurance, Honan recommends seeking an independent valuation of your property to ensure you’re covered for the correct amount. A property owner can also use an insurance calculator for a desktop estimation. The Insurance Council suggests policy holders can review their property on a room-by-room basis to assess their contents and use an insurance calculator to estimate the building sum insured amount. The insurance calculator is an estimate and is not intended to replace a professional valuation. Please feel free to reach out, Honan can refer you to our partnered valuers / quantity surveyors to assist you with this process.

 

 

Corporate Snapshot: FY21 Q1-Q2

Insurance Updates

In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.

 

KEY TAKEAWAYS FROM FY21: Q1?

While the March quarter saw Australian insurers post a quarterly loss of $997m after tax, APRA statistics released for the June quarter reveal a market turnaround, with a net profit of $1.0bn after tax. Improved loss ratios and slight gains from investment returns were the main drivers of this result.  Despite this, Property & Casualty underwriters continue to focus on overall portfolio management, which includes:

– pricing adequacy

– risks in catastrophe zones (bushfire, cyclone, flood)

– ‘sideway’ exposures such as prevention of access

– higher Worker to Worker deductibles

– tightening of cover (infectious disease exclusions).

In addition to upward premium pricing for primary and excess layer(s), casualty underwriters have been undertaking remediation actions across their portfolios.  As with property, casualty underwriters’ portfolios continue to see deterioration in loss ratio(s) brought on by claims frequency, long term inadequacy of pricing, broadened cover and the rising cost of claims (e.g. higher prevalence of litigation).  Rate increases of between 10-20% are being witnessed on primary layers with excess layers seeing reasonably calmer pricing increases of 5-10% at this stage.

 

KEY CONSIDERATIONS FOR FY21: Q2?

As we move into the summer months, the regular seasonal risks are present: bushfires in the southern states with cyclones, windstorms and flooding in the north.  This season is widely tipped to see La Niña conditions return to eastern Australia, meaning increased rainfall and a risk of more tropical cyclones forming across parts of Queensland.  Insurers may apply policy adjustments by broadening flood and named cyclone sub limits or may mitigate their own risk through the purchase of reinsurance.  This last strategy will invariably come at a cost, which will be passed on to clients either in part or in full.  High performing or clean risks remain desirable and continue to see more favourable pricing outcomes.

From a casualty perspective, we expect the current trends to continue over Q2.  Insurers will be taking a much firmer stance on their capital deployment and could lead to a reduction in capacity on certain risks.  Coverage provisions are also being reviewed, especially those considered non-traditional that have crept in over the past few years, including Cyber and Professional Indemnity.       

 

WHAT INDUSTRY TRENDS SHOULD CLIENTS MONITOR OVER THE COMING QUARTER?

Insurers require greater levels of information to adequately underwrite risks, especially on those accounts where they are not active/current participants.  With insurers reducing their capacity, many clients are now required to market their program to new insurers, many of which are unfamiliar with the specific risks of that business.  A quality submission with updated risk information is key to achieving a positive outcome and a powerful point of differentiation from others, especially in industries deemed high risk. 

From a property perspective, unprotected food & beverage is still considered high risk, even more so for those with bushfire or cyclone exposure.  Liability risks subjected to the highest level of scrutiny are those in the commercial cleaning, asbestos removal, contractor/labour hire sector as well as Global Liability programs with risks domiciled in the US.

 

 

We’re With You All The Way

Feel free to reach out to discuss your situation and address any questions or concerns.

 

Travis Wendt

National Head of Corporate Insurance & Risk

travis.wendt@honan.com.au

+61 434 651 918

Strata & Real Estate Snapshot: FY21 Q1-Q2

Insurance Updates

In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.

 

KEY TAKEAWAYS FROM FY21: Q1?

The past quarter has seen an ongoing trend of strata residential premiums increasing by around 5-10% nationally. The commercial strata property increases have continued to trend higher (above 10%). Non-strata commercial property insurance underwent a 5% rate increase last quarter (on average) and will likely undergo slightly higher increases in the coming quarter.

Scrutiny over natural peril risk exposures relating to catastrophic events continued to drive premium increases. The fifteen-minute summer hailstorm in Canberra was potentially the most damaging “cost per minute” event of the past year for the strata industry. Fallout from the summer bushfires has considerably impacted commercial property rates and property in alpine risk locations.

 

KEY CONSIDERATIONS FOR FY21: Q2?

As the State election looms in Queensland, discussions have turned to Government taxes that are inflating North QLD premium. The QLD State’s Stamp Duty tax and Federal Government GST on North Queensland dwellings contribute a significant percentage of overall premiums.

In their November 2020 report, the ACCC will likely focus on further analysis and recommendations around exclusive insurer distribution agreements, third line enforcing and insurance commission in North QLD. The ACCC may also comment on the ongoing insurer exodus in North QLD, as the last quarter has seen another large international insurer cease writing risks in North QLD.

In NSW, increases to the compulsory NSW Emergency Services Levy (ESL) used to fund Emergency Services via property insurance premiums are pushing prices higher. Insurers have been required by government to increase their NSW ESL rates over the past quarter, these NSW Government ESL charges are seeing premium increases of approximately 5% across the State.

 

Example of 1 Oct 2020 NSW ESL increases from unspecified large NSW strata insurer:

Insurance Class ESL Increase From To
Commercial Strata 30.5% 39.5%
Residential Strata 15.5% 22.5%

 

The South Australia and Western Australia strata and commercial insurance prices continue to be among the lowest premium prices nationally. The Adelaide Earthquake and Perth hail and storm natural perils risks mean each insurer is pricing these locations in vastly different ways, some insurers have dramatically raised rates on new business in these locations, while other insurers are renewing with flat to minimal premium increases.

 

WHAT INDUSTRY TRENDS SHOULD CLIENTS MONITOR OVER THE COMING QUARTER?

Alpine and above the snowline areas in NSW and Victoria have become the new challenge areas for FY21. Honan has created a limited bulk property placement solution into international insurance markets to secure coverage options. Locally, the alpine locations have seen insurers (strata and non-strata) coming off risks completely or scaling back the limits they will provide for bushfire exposure. Consequently, Honan is placing bushfire locations with either a defined perils program or a combined limit basis into international insurance markets, using higher bushfire deductibles and excess solutions to secure coverage for snow lodges and strata buildings.

In Victoria, the pandemic will likely further impact the challenge of insuring unoccupied locations. Overall, the commercial property insurance rates have been steady at 5% rate increases over the past couple of years. Some movement above this 5% increase is now likely for a third of renewals.

 

 

We’re With You All The Way

Feel free to reach out to discuss your situation and address any questions or concerns.

 

Kieran Drum

National Head of Strata

kieran.drum@honan.com.au

0488 688 656

 

Financial Lines Snapshot: FY21 Q1-Q2

Finance

In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.

 

KEY TAKEAWAYS FROM FY21: Q1?

Pressure remains in the Professional and Executive markets, with COVID-19 causing continued uncertainty for insurers.

Fallout from the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry continues to impact insurers’ bottom lines through the payment of inquiry defence costs and securities class action activity. This is expected to materialise further as the economy begins to stabilise, with many litigation promotors seeking new ‘real estate’ and the regulator supporting the ‘why not litigate’ approach.

The Australian Competition and Consumer Commission’s (ACCC) Targeting Scams 2019 report has identified Australians lost more than $634 million to scams in 2019. While the true cost of cybercrime to the Australian economy is difficult to quantify, the industry has estimated cyber security incidents to be in the vicinity of $29 billion annually. Managing cyber risk exposure effectively is more important than ever. The process for enhancing and governing cyber security will be very similar to the process businesses implement for other exposures (e.g. OH&S) and how well these are ‘live drilled’ or rehearsed.

 

KEY CONSIDERATIONS FOR FY21: Q2?

It’s not all doom and gloom. If the following variables are controlled correctly, they can have meaningful impacts on renewal outcomes.

Corporate Governance – It is important that best practice framework is implemented: entities that are well managed, identifying clear procedures to business operations and communication channels will see a more positive outcome when it comes to achieving reduced premiums. This has been a topical issue, with revelations of a handful of large listed companies being subject to poor corporate governance, driving investor concerns and share price uncertainty.

Financial Steadiness – will continue to be a focus for insurers, as the ongoing concern for a business will remain a material risk factor. In the COVID-19 climate, there will continue to be greater attention on liquidity, cash flow and debt maturity. For franchisees, the ‘JobKeeper’ program may be providing critical revenues for these entities that are potentially masking insolvency problems. 

 

WHAT INDUSTRY TRENDS SHOULD CLIENTS MONITOR OVER THE COMING QUARTER?

Financial Modelling will play a crucial part in all financial lines insurance classes, and proposal forms and financials will no longer satisfy many underwriters. Insurers will want to understand what the future holds for many organisations. Underwriters will likely request to see a robust Business Continuity Plan and a recovery ‘roadmap’, identifying any loan facilities and those suspended covenants and how they propose to weather the next 6-12 months.

 

 

We’re With You All The Way

Feel free to reach out to discuss your situation and address any questions or concerns.

 

Ben Robinson

Placement Manager – Professional and Executive Risks

benjamin.robinson@honan.com.au

 

Honan launches New Extended Mechanical Warranty Policy

Agriculture

Working with Plant & Equipment (P&E) partner, Heavy Machinery Warranty, and underwritten by Lloyds of London, the policy is a new introduction to the Australian market.

Unlike alternative P&E warranty options on the market which typically require machinery dealers to offer indemnity and then seek recovery from the insurance product, the new Extended Mechanical Warranty places policy ownership in the hands of the insured party. Bypassing the need for manufacturer and/or supplier assessments, policy holders (machinery owners) can claim directly against their policy, rather than relying on dealerships to facilitate claims on their behalf.

The cover offered under the policy includes the replacement of parts and/or repair costs to the hydraulics and powertrain following sudden and unforeseen loss. The policy is also available for makes and models of the following types of equipment:

 

Construction Equipment

  • Excavators
  • Bull dozers
  • Wheel loaders
  • Motor graders
  • Articulated trucks
  • Rollers

Agricultural Equipment

  • Tractors

Material Handling Equipment

  • Telehandlers
  • Forklifts

 

We’re with you all the way

For further information on the Heavy Machinery Warranty Policy, please contact Scott Cole at any time.

Scott Cole

scott.cole@honan.com.au

+61 447 566 008

COVID-19: Business Interruption, Contingency and Workplace Risk

Agriculture

On 30 January 2020, the World Health Organisation declared the Coronavirus outbreak a Public Health Emergency of International Concern. We sympathise with everyone who has been impacted by the virus and Honan Insurance Group have implemented additional resources and contingency planning to ensure that we remain able to provide advice, insurance and support to our clients as the situation develops.

 

As the impact of COVID-19 on local and international economies continues to evolve, we highlight to all clients the need for management to consider financial, strategic and business risks to operations. In this article, we examine the key areas we have received the most queries about: Property and Business Interruption, Business Contingency and Workplace Risk.

 

Industrial Special Risks* (Property and Business Interruption) Insurance & COVID-19 

(Potential Policy Response under ISR Mark IV Policy)

It is expected that many businesses will suffer disruption as a result of the spread of the Coronavirus (COVID-19).   With the situation changing rapidly and restrictions on the movement and gathering of people (both at local level and internationally), there is no doubt many companies will suffer from loss of revenue and/or additional expense.

 

Property Damage

Generally, property policies (including office risks) cover physical loss, destruction or damage to insured property resulting from a covered peril (all risks).  In the case of the Coronavirus, the ISR (Mark IV) policy exclusion 4(a) excludes physical loss destruction or damage occasioned by or happening through disease.  Office-related risks also have very similar exclusions. The ISR policy can include a myriad of endorsements with some coverage writebacks for costs to clean-up a site (where required by order of a public authority), however, this would need to be reviewed on a case by case basis.

 

Business Interruption

An ISR insurance policy extends to include under Section 2 coverage for business interruption.  This cover traditionally applies only to interruption caused by an insured material damage event such as fire, storm, impact or accidental damage.

In addition, cover is extended to include closure of the business by public authority for several risks including human infectious or contagious diseases.   This coverage was designed to cover events such as an outbreak of Legionnaires disease or measles which could affect one or two buildings and a small number of businesses.  Some ISR policies can extend to provide coverage for outbreaks in a 20-50km radius from the insured location.

Specifically, in relation to the COVID-19 outbreak, the ISR policy contains a specific exclusion for loss resulting from interruption of or interference directly or indirectly arising from or in connection with Highly Pathogenic Avian Influenza in Humans or any other diseases declared to be quarantinable diseases under the Quarantine Act 1908 and subsequent amendments.

Following the H5N1 virus (avian influenza) outbreak in 2006 and the H1N1 virus (swine influenza) outbreak in 2009, insurers adopted this exclusion as a market standard position in Australia.

The Australian Quarantine Act 1908 was replaced by the Biosecurity (Consequential Amendments and Transitional Provisions) Act in 2015.  COVID-19 was added to the Act as a listed (quarantinable) human disease on 21 January 2020, under Biosecurity (Listed Human Diseases) Amendment Determination 2020 (Cth) F2020L00037.

 

Listed Human Diseases under the Act are thus now:

  • Human influenza with pandemic potential
  • Plague
  • Severe acute respiratory syndrome (SARS)
  • Middle East respiratory syndrome
  • Smallpox
  • Viral haemorrhagic fevers
  • Yellow Fever
  • Human Coronavirus with pandemic potential

As a result of the above, the business interruption section of your insurance will not provide cover for COVID-19 disruptions. As with any other threat it is important to consider what risk management measures you can introduce to mitigate the risk to your staff, customers and business.

 

Risk Management Tips: How to avoid infection

Here is a short list of ways to minimise the spread of Coronavirus

  • Practice good personal hygiene.
  • Avoid contact with anyone with or suspected of having Coronavirus.
  • Boost your immune system by eating well, exercising, having enough sleep, and keeping your stress levels under control.
  • Cancel or delay any travel until the crisis is over.

 

Recommended Actions for your organisation:

  • Implement a home quarantine regime for anyone that has travelled to an infected country or is likely to have been in contact with someone infected with Coronavirus.
  • Review and update if necessary human resource (‘HR’) policies on fitness for work including possible quarantining of employees and formalising the requirement for employees to remain off work if affected.
  • Consider or extending flexible working arrangements to reduce the likelihood of the spread of the virus in the workplace or the community.
  • Update travel rules and arrangements limiting non-essential business travel.
  • If not already in place, provide sanitized hand washing stations for use by staff and visitors.
  • Review arrangements for workplace hygiene and cleaning protocols including “cough and sneeze” etiquette.
  • Protect the mental wellbeing of employees concerned about the Coronavirus.
  • Ensure clear and honest communication to employees on their welfare.

 

Keep Informed

Everyone should remain alert for updates and advice from the relevant authorities on additional steps to manage the spread of the disease. The health department in each state is providing excellent resources and advice and regular updates. Before travelling, check for and take the advice of any travel warnings on smartraveller.gov.au.

 

Business Continuity Management Planning

A pandemic is just one risk facing modern organisations.   Having a fully documented and exercised business continuity management plan is important for every business.  Honan has resources to assist you in developing a business continuity plan and please speak to your Client Manager for further information.

*Property/Office/Business Interruption

 

Business Contingency

The Coronavirus may impact revenue for businesses through:

  • Production slowdown & disruption to workforce (sick or quarantined employees)
  • Disruption to Supply chains and supplier services
  • Decrease (or increase) in demand for stock
  • Large scale closures of consumer markets and public spaces due to quarantine
  • Delays in customers paying outstanding invoices within normal trading terms
  • Economic slowdown on global and local scale

 

Whilst there is coverage available under Corporate and Business Travel insurance policies in certain circumstances, there is limited cover available under most standard General Insurance policies for loss of trade and interruption to business operations.

As a general rule, it is not viable for most insurance markets and products to cover “global pandemics” as an insurable event. This is because the financial impacts of a pandemic are not quantifiable, meaning risk cannot be priced accurately or sustainably by insurers. If you do suffer a loss, please contact our team to discuss the specific circumstances and how your policy may respond.

Whilst insurance cover availability may be limited, businesses can prepare.  We would strongly recommend formation of a working committee to evaluate the impact to business as conditions continue to evolve, with accountability to the board or executive team.

 

Considerations for a COVID-19 working group should include:

  • Review of policies, procedures and protocols in place to protect the safety and wellbeing of employees and prevent further risk of spread of COVID-19 within the workforce and community.
  • Assess venerability of IT Infrastructure (including stress-testing) for an organisation’s ‘Work from Home’ capabilities in the event of premises closure/staff quarantine
  • Consider the impact on supplier and customer contracts to meet delivery/service obligations from both parties (how Contractual Penalties & Force Majeure clauses may be applied)
  • Evaluation of possible supply chain disruptions and how these can be mitigated or bypassed through appropriate work arounds and contingency planning
  • Evaluation and stress testing of stock levels and planning for inventory shortage as supply from China recommences operations
  • Review ability to support alternative revenue streams that are not as severely impacted by COVID-19
  • Review communications with key customers and other stakeholders to maintain relationships and manage challenges in a sensible, commercial & collaborative manner
  • Review credit and debt facilities to ensure that cash is available in the short term to manage financial impacts and support increased business restart
  • Communicate with creditors if a reduction in revenue has the potential to impact on cash flow and financial obligations.

 

 

Workplace Risk: Workers’ Compensation and Coronavirus (COVID-19)

There has been much discussion around the exposure and potential liability under Workers’ Compensation should an employee or contractor contract Coronavirus.

As outlined by Safe Work Australia (2020), Workers’ Compensation arrangements differ across schemes, however there are common threshold requirements that would apply in the case of COVID-19:

  • that the worker is covered by the scheme, either as an employee or a deemed worker
  • that they have an injury, illness or disease of a kind covered by the scheme, and
  • that their injury, illness or disease arose out of, or in the course of, their employment.

Compared to work-related injuries, it is difficult to prove that a disease was contracted in, or caused by particular employment. In the case of a virus such as COVID-19, establishing the time and place of contraction may become increasingly hard. We have sought clarity from our legal partners and obtained publications from the governing state regulators. Their view is it will be challenging to prove workplace exposure to Coronavirus as questions will arise as to the exact time and place of contraction.

For coverage to exist, a determining authority would need to be satisfied that the employment significantly contributed to the employee contracting the virus. For viruses, it can be difficult to accurately determine the exact time and place of transmission. As a result, it may be difficult to determine that employment significantly contributed to the virus.

However, where an employee’s employment puts them at greater risk of contracting the virus the significant contribution test may be easier to meet. For example, if the employment involves:

  • travel to an area with a known viral outbreak
  • activities that include engagement or interaction with people who have contracted the virus
  • activities that contravene Department of Health recommendations.

Each workplace illness would need to be considered on its individual merits, having regard to the individual circumstances and evidence in relation to the claim. More information is available here: Comcare Australia.

Deeming an illness or disease as work related and unique to the workplace may require court intervention to distinguish medical opinion from legal facts. There is no liability determination available to declare an illness or disease compensable or non-compensable; each case is determined on its own merits and circumstances.

Although you may not be able to eliminate the potential risk of employees contracting Coronavirus while carrying out work, you must do what is reasonably practicable to minimise the risk of employees contracting Coronavirus.

 

Coverage while travelling overseas for work

Any liability or workplace contribution applies to both employees working overseas and those working within Australia. Each case will be determined on its own merits and circumstances.

Note: For international employees engaged locally, state or country specific legislative conditions will apply. Queries should be directed to Honan. Depending on the state of urgency, travel restrictions and periods of self-isolation may need to be considered and communicated to all employees and contractors.

 

Employer Support

It is important that employers refer to internal policies and procedures to ensure measures for employee safety are in place. Honan has resources to actively advise on Workplace Risk exposure, as well as Legal and Work Health and Safety partners who can assist with ongoing management of this changing environment.

 

All companies will need to keep up to date in what is evolving environment.  Please see below some resources to do so:

Australian Government Department of Health

Safe Work Australia

Smartraveller

McKinsey & Company have released a briefing paper (9th March 2020) which provides some insight into possible global economic impact as well as some common steps that can/need to be taken in preparation for businesses being affected and the formation of a working group: link here.

For any additional queries or concerns, please contact your Honan client manager.

 

*Property/Office/Business Interruption

The advice in this paper is general in nature. While the utmost care has been taken in the preparation of this preliminary advice or opinion, you use it at your own risk.

If you have difficulty reading and/or understanding the cover provided in the policy(ies) that you have please contact your Client Manager.

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