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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.
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.
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.
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.
Feel free to reach out to discuss your risk exposures.
Head of Professional & Executive Risks
Client Manager - Professional & Executive Risks
Find out more about Honan's Professional & Executive Risk Services.
