Social
The recent spate of foreign cyber attacks against Australian organisations has put cyber exposures in Australia under the microscope. As a result, cyber related claims are expected to increase, particularly with more Australians now working from home and relying on remote digital platforms to interact and conduct business.
With considerable movements in premiums across insurers’ financial lines portfolios, pricing corrections continue to occur. COVID-19 has compounded this, with some listed Directors & Officers insurance (D&O) renewals clocking triple-digit price increases in Q4. Underwriters have placed D&O excess rates under scrutiny - particularly large limit programmes. This is particularly so for London-based programmes with historic increased limit factors (ILFs) on excess layers.
Management Liability programmes are experiencing increases to premiums due to COVID-19 related events such as unfair dismissal, mismanagement, Employment Practices disputes, and increased insolvency risks. Underwriters are particularly concerned about insolvent trading-based claims, as well as shareholder and creditor actions arising from mismanagement.
With market conditions changing so dramatically over the last 12 months, even short to medium trends are difficult to predict. When it comes to securing the best possible results for clients, a broker’s capacity to understand underlying risk factors and complex market dynamics has never been more critical. Underwriters are now prepared to walk away from risks that don’t fit their appetite or fail to attract adequate premiums.
With a view to stalling an avalanche of COVID-19 related business failures, a six month moratorium on insolvent trading laws has been instituted to help businesses (effective March 25, 2020).
The Federal Government has provided a six-month limited softening of continuous disclosure obligations (effective May 26, 2020) – largely to avoid the risk of future class actions for businesses struggling to forecast the true impacts of COVID-19. Under the six-month reprieve, companies and their officers will only be liable if there has been knowledge, recklessness, or negligence with respect to updates on price-sensitive information to the market. From August 22 this year, litigation funders will be required to take out an Australian Financial Services Licence and comply with management investment scheme rules.
Aside from insolvency, the likely focal point of the D&O liability arena will be business preparedness and actions taken by management to ensure the business model, systems and procedures are enough to withstand anticipated COVID-19 headwinds.
Insurers are currently facing two major hurdles: poor underwriting performance from natural catastrophe/operational losses, and diminished investment returns resulting from COVID-19. Insurers’ risk appetite has become more conservative as they focus on profitability - a trend that was further inflamed by poor industry performance for the March quarter (net profit loss of $997M after tax). On average, rates have increased 10-15% for loss-free ‘vanilla’ risks, while ‘high hazard/hard to place’ risks clocked an average increase of 25%. At the other end of the spectrum, some risks cannot be placed - either capacity doesn’t exist, or the pricing simply isn’t feasible.
March is typically a reliable performance indicator for June, and with a 46.1% increase in gross incurred claims (+$4.8B from December quarter), the last month was certainly predicted to be a challenging one. While full year FY20 APRA statistics are yet to be released, they are expected to look bleak, particularly from December onwards.
Across the Australian market, challenging conditions are forecast to continue for at least the next 18-24 months. While the September quarter is traditionally the most benign from a natural catastrophe perspective (bushfires, hailstorms and cyclones), insurers will remain steadfast in adequately pricing risks that carry such exposures, adding upward pressure on premiums. Additional referrals and underwriting approval requirements will also reduce capacity, leading to smaller line sizes, reduced limits, and lower coverage.
Risk protection, management and improvement is key in attracting interest from insurers. Time spent on external benchmarking as well as detailed internal analysis of operations (recovery plans, contract review/transfer) will help ensure client policies remain truly fit for purpose. Insurers will maintain a strict focus on sideways/contingent exposures such as prevention of access and customers/suppliers and will impose limitations where cover has traditionally been provided as a value-add.
PREMIUM FUNDING remains a useful tool for regulating cash flow, allowing working capital to remain within the business.
While certain industries and businesses have been impacted by COVID-19 overnight; the impact to Workers Compensation will be a slow burn, particularly as some areas regress, such as Victoria. Over the last quarter, the State Regulators responded by providing relief, with JobKeeper payments excluded from WorkCover premiums calculations and working with Employers in providing premium support in certain scenarios.
NSW and WA introduced new Legislation, providing a “presumptive relationship” between COVID-19 and certain industries, which changes the landscape of liability exposure for Employers in these industries. While liability still needs to be established as being “in the course of employment”, the presumptive relationship reduces an Employer’s defence against liability concerns. You can read more about Claim Liability Determination – COVID-19 in Scenario 3.
As wage declarations are now due across all states and territories, Regulators have provided exemptions around JobKeeper payments, potentially reducing Workers Compensation premiums. See your State or Territory regulator website for specific information.
Premium support and Presumptive relationships seen in Q4 will continue to be a feature this quarter.
As changes to the JobSeeker payments come into effect and job uncertainty continues for many Australians, we expect to see the volume of Workers Compensation claims increase. This is an addition to claims relating to COVID-19, particularly as a response to recent outbreaks. Employers will need to remain vigilant to ensure staff are being supported and early intervention measures are taken to reduce exposures if there are concerns about claims developing.
The last 3-6 months has been a rollercoaster for much of the Strata and Real Estate sector. Strata and Real Estate have endured significant natural catastrophes and COVID-19 has impacted rent default for Landlords Insurance. Claims processing and repairs/maintenance work were also delayed by COVID-19 lockdowns.
The most heavily hit premium increase areas for Strata and Real Estate continue to be the North Queensland and Alpine / Snow risks. A lack of local insurer interest has led to overseas markets being utilised more regularly, sometimes with a 300-500%+ increase in premiums.
Residential strata insurance premiums have begun to stabilise after three years of double-digit increases. Due to the introduction of three new residential strata products in the market, we are predicting a lower trend of 5-10% premium rate increase across most of Australia into the next quarter. Commercial and Industrial strata are not holding up quite as well. Higher hazard buildings or locations with high hazard occupancy continue to see premium increases in the range of 10-20%.
We anticipate COVID-19 will have knock-on effects for the recovery of Landlords insurance products with tenant loss of rent and rent default cover. With the Federal Government’s moratorium on evictions, Landlords insurance products will continue to offer reduced cover in the rent default space for new business for we anticipate to be the remainder of 2020.Commercial real estate renewal premiums are likely to continue to increase by 5-10% into the next quarter. Rent abatement and insurance premium funding of deferred payment plans have supported the commercial property sector to date, though the likelihood of owners and businesses maintaining full operations and profitability is now less certain. Unoccupied commercial buildings have been notoriously difficult to insure if vacant for more than 6 months. Most insurers are taking a pragmatic approach and treating many risks as ‘temporarily suspended in operation’ and maintaining much of the coverage.
