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In response to the 2020-21 Black Summer catastrophe, a recent senate inquiry has proposed increased government risk mitigation spending from the Emergency Response Fund, along with an ACCC inquiry into the availability of insurance cover.
With concern to insurance cover, the proposed ACCC inquiry will review the availability and cost, premium cost breakdown, coverage terms and conditions, the competitiveness of the market, and barriers to entry or expansion. Although Eastern Australia is currently experiencing a La Niña event with above-average rainfall, the severity and frequency of bushfires are predicted to increase in Australia and the sustainability of insurance cover will become a critical component in the protection of Australian homes. We may see significant changes to bushfire cover under Commercial Property and Home and Contents policies in the next few years.
We will continue to see rate stabilisation across the broader property segment as a result of underwriting remediation over the past 5 years. The October 2021 storms in South Australia have contributed more than $1 billion in losses in the local market, which may potentially impact rate stability during the March quarter (Q3).
In the Casualty market, we expect to see continued upward pricing for the remainder of 2022 as the volume of long-tailed claims develops further. Technology and Cyber risks will continue to experience harder conditions with insurers imposing higher rates, reduced capacity/limits, and restrictions in some aspects of cover.
Workforce shortages across Australia due to the Omicron outbreak are placing considerable pressure on businesses, potentially hindering the ability to deliver on contractual obligations to customers. This may result in a contractual liability exposure for businesses struggling to meet deadlines and supply obligations. Available insurance coverage under Business Interruption policies will depend on the construction of various disease and contractual liability exclusions.
The ongoing interruptions caused by COVID-19 are also keeping the test cases firmly in the spotlight. On 12 November 2021, the appeal of the second COVID-19 Business Interruption (BI) test case ended. While three Federal Court justices spent a week listening to arguments concerning 6 cases, judgement is currently reserved, with a decision yet to be handed down. The outcome of this appeal will have major ramifications for policyholders, as the coverage response to Business Interruption claims under various policies hinges on the interpretation of the proximity of a COVID-19 outbreak to the insured premises and the impact of government lockdown mandates. We are watching the outcome closely and will provide an update when a decision is handed down.
The deadline for claims handling providers to be granted an Australian Financial Services License has now expired (31 December 2021). We anticipate a slight shrinking in the Third Party Administrator (TPA) claims market for suitable providers and increased regulatory scrutiny.
The last quarter showed greater signs of stabilisation and we are optimistic this will continue to improve for insurance buyers in 2022. In addition to new capacity entering the market, existing players have increased their appetite for a wider range of risks, which is often required for the market to soften and bring a welcome deceleration in premium increases. The volume of securities class actions in 2021 declined again to 6 for the year which is much lower than peak numbers in 2017 and 2018 of 24 per year. This will improve insurers’ loss ratios, and the regulation of litigation funders and changes to the continuous disclosure laws will hopefully see a continuation of lower-securities class action numbers in 2022, enticing new market entrants for ASX companies.
Whilst rates did increase, the severity of these increases remains much lower than previous quarters, suggesting the corrective portfolio measures required in the D&O space have largely been achieved and pricing is now at a sustainable level for insurers. Some insureds were the beneficiary of rollover (and occasionally, renewal rate decreases) if their industry was unaffected by COVID-19 and they not only performed well financially but upheld exceptional corporate governance. Conversely, companies heavily impacted by the pandemic with signs of insolvency risks continue to experience challenging renewals.
Environmental, Social, and Governance (ESG) issues are becoming more important to investors.The prevalence of ESG related litigation by shareholders and other stakeholders is increasing globally, particularly around failure to meet climate change and diversity targets and focusing on execution of business strategy from an ESG perspective. Boards should take the time to understand ESG-related risks covered under their D&O insurance policies, and whether any exclusions such as environmental-related provisions should be reviewed to reflect their evolving exposures.
Cyber risks continue to be a key exposure for directors, with ransomware attacks increasingly prevalent and severe. Boards will be subject to both shareholder and regulatory scrutiny as to how cyber risks have been managed in the event of a cyber incident.
It should also be noted that insurer appetite for Public Offering of Securities Insurance (POSI) remains strong, with the Australian share market seeing one of its strongest years for initial public offerings in 2021. Insureds exhibiting a profitable track record, strong positive operating cash flow, and who are seeking to use capital proceeds to fundamentally scale (rather than pay down debt) are being looked upon favourably by carriers. With respect to purchasing behaviour, buying patterns have been mixed with insureds either opting for stand-alone POSI or incorporating cover for the IPO/Prospectus under their standard D&O insurance policy.
While the full effects of COVID-19 continue to be realised, underwriters are cautiously monitoring their portfolios and the solvency positions of Insureds. Employment Practices Liability (EPL), Statutory Liability, and Crime insurance have been under-priced, resulting in corrective measures being implemented on a portfolio basis via increased costs and coverage restrictions for certain industries. Insureds with high exposure to these entity-type claims should consider un-bundling these covers from the Management Liability package and purchase coverage on a stand-alone basis.
CYBER LIABILITY
Cyber Liability continues to experience the greatest degree of change. In addition to increasing rates and more restrictive terms, buyers will be asked to demonstrate their commitment to cybersecurity risk mitigation as underwriters become more selective and willing to decline or not renew risky accounts.
Manufacturing and wholesale and distribution sectors continue to be particularly challenging areas from a loss perspective. These sectors continue to be targeted by cybercriminals largely due to cyber security immaturity in these industry verticals relative to other verticals. As a result, manufacturers, wholesalers, and distributors have seen an increase in the frequency and severity of ransomware attacks.We are also witnessing an uptick in attacks for companies operating in the mid-market space, particularly companies with revenues in excess of $50 million.
Insureds need to provide evidence they are prepared for a cyber-attack and have (at a minimum) the following measures in place:
PROFESSIONAL INDEMNITY
The APRA quarterly general insurance performance report (November 2021), reported an industry net profit of $846 million, driven by strong increases in underwriting results, particularly in the Professional Indemnity class. However, we are expecting continued corrections for this long-tail class, with pricing increases expected in 2022. Large accountants, financial planners, lawyers, valuers, mortgage brokers, and construction professionals continue to face supply and demand issues. There is new capacity available in the market in 2022 off the back of improved rates that have been achieved in recent years. This additional capacity will provide more options for buyers and increase competition between insurers.
INFORMATION TECHNOLOGY LIABILITY
The technology sector continues to evolve rapidly, triggering some challenges for underwriters in 2021. The sector (for the most part) remains a profitable class for insurers, and we expect this trend to continue in 2022.
Some areas continue to attract greater scrutiny than others. The following is a non-exhaustive list of those requiring greater attention and longer lead times to enable a successful renewal cycle:
If your business falls within any of these categories, we encourage you to begin discussions early with your broker to ensure a plan is mobilised well before the renewal date. Many cyber risks will fall within these renewal programs, so we encourage reference to the cyber minimum controls (outlined above) in submissions.
FINANCIAL INSTITUTIONS
In Q2 FY22, the Financial Institutions (FI) insurance sector held up well notwithstanding COVID-driven market volatility. Insurers have shown a preference for insureds with a wholesale sophisticated client base, with those servicing the retail sector incurring stricter underwriting practices due to higher regulatory exposure. While the general outlook for the space is favourable, uncertainty around the impact of potential COVID variants on portfolio performance remains. This, alongside other factors such as soaring inflationary pressures, rising interest rates, and supply chain disruption are likely to be focal points for underwriters in reviewing fund asset allocations and, ultimately, making decisions on capacity deployment and premium.
Businesses that take time to demonstrate the strength of their risk management practices and culture will continue to realise the greatest benefits. Insurer meetings are critically important, enabling insureds to build rapport with underwriters and communicate the individual characteristics of the company.
Underwriters will continue to focus on quality risks. Companies that continue to address their risks and maintain a focus on their risk profile will be the first to benefit from this market improvement.
As always, engagement well in advance of renewal dates is required. A considered plan and clear timeline will help to guide all parties through a more successful renewal.
We are continuing to see the consolidation of group insurers (GIs) in Australia through mergers and acquisitions, although major GIs continue to compete to retain business. In parallel, rates are being impacted due to high levels of claims activity - many clients coming out of 2-3 year rate guarantee periods are facing rate increases between 40 - 50%. The disability market has been particularly impacted, with mental health now a key driver of claims activity, and GIs brace for the long-term impacts of COVID-19.
Competition for talent in Australia has never been fiercer. A recent study by PwC reported almost 40% of Australian employees surveyed are considering leaving their current employer in the next 12 months, with Gen Z and Senior Executives most likely to leave (and often the most costly to replace).
Closed borders and reduced migration to Australia during the pandemic have led to further talent shortages in the local market across vast industries. Due to the reduced labour market, proactive organisations with structured and holistic employee benefits propositions are more likely to attract and retain the best talent. Organisations need to consider benefit plans that reflect their employees’ overall health and wellbeing – one that holistically targets their mental, physical, and financial needs, and is supported by a technology platform that drives strong engagement, understanding, and usage by staff. These elements are critical for employees to value their benefits and enjoy a seamless experience.
Technology continues to be a key industry for employee benefits (EB) in Australia. The recently formed Tech Council of Australia has ambitions to see one million people employed in technology jobs by 2025. It is, therefore, no surprise that EB remains a top priority for technology companies looking to attract and retain the best talent in an extremely competitive market.
A recent PwC survey revealed wellbeing is the second most important factor for employees in their decision to join or leave an employer. In addition, 85% of workers reported that their wellbeing has deteriorated during the pandemic, with 1 in 2 workers experiencing mental health challenges over this time. In response, we are seeing an increasing number of companies invest in their employees’ mental health through targeted support, building such offerings as health and resilience workshops, manager training, support for working parents, and mindfulness workshops into their benefits programs. Find out more in this essential benefits briefing.
Technology will continue to play a key role in the EB space, with more organisations adopting benefits platforms to deliver their programs. Honan has partnered with Zest to provide a market-leading platform that allows organisations to showcase their overall benefits in a unique and customised way for a seamless employee experience. Please contact us with questions at any time, or to book a demonstration.
The Victorian Auditor-General’s Report released in November 2021 outlined the outstanding insurance claims liabilities (provision for claims relating to insured events that have not yet been paid); specifically addressing the performance of the Victorian WorkCover Authority (WorkSafe). With a significant increase in the volume of injury claims and time spent accessing benefits, an independent review in 2020-21 found WorkSafe's financial trajectory to be unsustainable.
To limit the impact to businesses, the State Government provided WorkSafe with $550 million to help support its financial position in the short term, allowing WorkSafe time to explore options to manage its long-term financial sustainability.
Similar to icare in NSW which is also reporting major deficits, workers' compensation schemes are often identified as unsustainable (and while reforms are one key change seen thus far), regulators will usually seek the easiest route to improve performance, which is through industry rate increases.
Also in NSW, The Workers Compensation Amendment Bill 2021 (NSW), which has the objective of repealing Section 19B of the Workers Compensation Act 1987 (NSW), passed in the lower house in November. This amendment seeks to remove the presumptive right to compensation for certain workers diagnosed with COVID-19 in NSW and was introduced in 2020 to provide essential workers in certain industries the right to compensation.
As we enter the second half of the financial year, and with most workers' compensation renewals due on 30 June, we expect to see rate increases across certain
States. We encourage clients with concerns about changes to premiums (particularly where they have had an increase in claims made) to contact their Honan advisor to understand how they may be impacted.Victorian employers can expect 30 June industry rates to be under scrutiny. As announced in early 2021, NSW will be increasing its premium rates by 2.9% over a 2-3 year period, commencing 30 June 2021.
The ongoing challenges of COVID-19 mean the return to workplaces remains uncertain. We will continue to communicate with all clients – both businesses and staff - about their unique challenges and how these can be managed. As always, businesses should continue to ensure their policies and procedures (including COVIDSafe Plans) remain robust and relevant to the changing environment.
In February, Honan is hosting a webinar focused on the impact of COVID-related claims and liability determinations in this evolving landscape. We look forward to sharing the invite shortly.
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