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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.
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.
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.
As Insurers introduce new underwriting guidelines for the calendar year, we will see:
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.
2020 showed us that change can come literally overnight and that as individuals and businesses, we need to be adaptable and resilient. In the context of workers’ compensation, something that has not changed is our continued responsibility to provide a safe work environment for our people. The widespread shift to remote working arrangements for many businesses created the potential for new risk exposures, while legislative changes were introduced under certain workers’ compensation schemes in response to COVID-19. Safe Work Australia’s recent COVID-19 report revealed as at 31 July 2020, there were at least 533 COVID-19 related workers’ compensation claims nationally. Of these claims lodged by 31 July 2020:
Claim numbers are expected to rise in response to Victoria’s second wave of infections that peaked in August 2020.
It has never been more important for businesses to understand their risk exposures, and ensure their processes, policies, and procedures remain relevant and responsive to the changing situation.
CGU’s withdrawal from the Victorian Workers’ Compensation scheme was a big surprise for all. The transition plan is not yet finalised, with CGU’s existing contract with Worksafe valid until 30 June 2021, however, there has been discussion of this being brought forward to expire on 31 March 2021. A policy transfer freeze was implemented by CGU following the impact of COVID-19 and due to end on 31 December 2021. It has been indicated that a policy transfer freeze will be extended until 30 September 2021.
With allocation of the CGU book of business yet to be confirmed, it is anticipated that businesses will be permitted to put forward a submission for their preferred Agent once CGU finalise their tenure.
NSW icare has announced the appointment of Richard Harding as CEO and Managing Director. This will be an area to watch as Harding seeks to navigate the NSW scheme back from the challenges of 2020.
NSW icare has also announced the appointment of their legal panel for workers’ compensation claims, which means the scheme has now removed the option for Employers’ “client preferred” Solicitors. This will have a big impact for any Lawyers and Clients who relied on these long-standing relationships. A transition arrangement is in place with the new panel coming into full effect from 30 June 2021.
With JobKeeper and JobSeeker payments due to end (on March 28 and March 31, respectively) and many businesses still being impacted by COVID-19 restrictions, there continues to be uncertainty around job security and income security. The reality is that many people will seek alternate options to close these gaps, and spikes in workers’ compensation claims are expected to continue. To demonstrate your commitment to employee safety and wellbeing, we encourage businesses to continue communicating with staff about changes to Government subsidies and resulting impact to the business and your staff.
