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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.
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.
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.
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.
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.
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.
The immediate exposure for Australian workers has decreased with the majority of businesses successfully transitioning to remote arrangements (and some now returning to the office). The insurance market is facing a high frequency of claims and large losses, resulting in delays for businesses following the initial lodgement of claims. While workers are still exposed to physical risks, the mental health risks are an increasingly significant challenge for both clients and insurers.
Meanwhile, Victorian Insurers have taken a proactive approach in the reporting and management of positive COVID-19 cases in the workplace. Clients are being encouraged to report any ‘outbreaks’ to their Insurer as soon as confirmation is received.
WorkCover WA has announced the abolition of the Common Law Termination Day (previously 12 months post the date of injury). This change has the potential to extend access to Common Law for existing claims where the three-year limitation period has not passed.icare in NSW have begun remediation of pre-injury average weekly earnings (PIAWE) errors and commenced payment to affected workers. When a work-related injury occurs, and the employee is unable to perform their full pre-injury duties, they may be paid a percentage of their PIAWE for a set period. It has been estimated that under and over payments will impact 5,000 to 10,000 injured workers with the estimated costs to be between $5 million and $10 million in total.
As businesses transition from home working arrangements back into offices, a degree of apprehension is to be expected from the workforce. Ensuring your business has a robust COVID-Safe Plan that has been communicated to all staff will support a safe and sustainable return to the office.
The Workers Compensation market typically experiences increased claim frequency within the months of November and December. We encourage business to demonstrate commitment to Work Health Safety and Workplace Risk practices, to support a healthy and injury free end to Q2 FY21.
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.
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
Commercial Strata From 30.5% To 39.5%
Residential Strata From 15.5% To 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.
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.
Meet Head of Corporate Insurance & Risk Solutions - Travis Wendt
