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We have been closely monitoring the outcomes of the two COVID-19 Business Interruption (BI) test cases underway in Australian courts. With two-thirds of Australian small businesses suffering loss of income related to COVID-19 outbreaks and one in ten ceasing to trade for a period, the outcome of these cases is paramount to the survival of many.
The first BI test case, which was run by the Insurance Council of Australia (ICA) and Australian Financial Complaints Authority (AFCA) argued that insurers could rely on the policy exclusion referring to the repealed Quarantine Act to deny COVID-19 claims. However, in November 2020, the NSW Court of Appeal ruled in favour of policyholders, citing that the Quarantine Act 1908 “and subsequent amendments” could not be read as also including the current Biosecurity Act 2015. As a result, insurers cannot rely on exclusions that only refer to the Quarantine Act to exclude COVID-19 BI claims.
As expected, the ICA appealed the outcome in the High Court of Australia, but on June 25, 2021, the appeal was rejected. While the outcome of the second BI test case (which examines issues of the definition of disease, proximity to an outbreak, and prevention of access due to government mandates) is still pending, policyholders are now being encouraged to lodge their claims with insurers.
The test cases have prompted insurers to review and revise their policy wordings and set aside millions in reserve to cover these losses.
Preparing a BI claim can be time-consuming. Depending on the extent of the income loss, it may be worthwhile engaging a forensic accountant (loss preparer) to assist in quantifying and preparing sufficient supporting evidence of the loss. Many policies provide coverage for these types of loss preparation expenses (up to a limit), but it is important to note that until the insurer accepts the claim and confirms the loss is covered, there is no guarantee the loss preparer costs will be covered. Honan is ready to assist clients in preparing claims or engaging reputable and experienced loss preparers to support a claim submission.
The last 12 months have seen a raft of regulatory changes related to claims handling and settling. As a result of the Haynes Royal Commission recommendations, claims handling and settling is now classified as a financial service, meaning as of December 31 this year, any business providing this service must hold an Australian financial services license (AFSL) for claims handling and settling. While there are some exemptions for brokers as intermediates, most insurers and claims third-party administrators will be required to hold the license. ASIC will work with AFSL applicants to determine the outcome of license requests between July 1 and December 31, 2021.
These changes, in addition to changes to the 2020 General Insurance Code of Practice and Dispute Resolution Processes Regulations, are designed to ensure an efficient, honest, and fair claims process. Claims Managers will need to demonstrate that all their representatives meet the standards in terms of claims progress timeframes, providing clear and regular communication, and adopting flexible and fair processes for claimants experiencing vulnerability or financial hardship. In FY22, Honan expects to see insurers providing significantly more communication around their claims services; from the provision of fact sheets when offering a cash settlement, to more streamlined dispute resolution processes.
Following significant re-alignment of premiums over the past three renewal cycles, the public company D&O insurance market now sits in a more sustainable position. The regulation of litigation funders’, proposed changes to continuous disclosure laws, and the Federal Court dismissal of the Worley Case are all positive developments. We now see signs of recovery with new capacity and fresh entrants offering competitive options for our ASX clients.
After several years of portfolio remediation, insurers underwriting financial institution risks now have more clarity on their underwriting appetite. Some insurers have even made aggressive client acquisition plays by way of targeting well-performing sectors, particularly Australian Financial Services Licence (AFSL) holders providing products and services to wholesale clients.
Companies offering lending products and services continue to experience supply and demand issues. Such issues are largely due to capacity constraints and reduced limits being offered by insurers still willing to provide Professional Indemnity (PI) cover, particularly ACL holders supplying products and services to retail clients.
All Australian Law Firms renewed their top-up PI insurance on 30 June. This sector continues to be challenged by the aftermath of the Lloyds Decile 10 Review (a focus on their poorest performing businesses), which had a significant impact on capacity, particularly for Firms looking to purchase large PI limits. Replacing capacity on these programs is now far more costly.
The most topical class in Q4 has been cyber insurance, which has experienced hardening conditions due to the increased severity of attacks, particularly ransomware events. Industry data shows business email compromise and ransomware are the most frequent cyber-attacks, with ransomware causing the highest severity of losses. The professional services sector has been most affected by cyber incidents. Real estate, non-profit, and healthcare also experienced notable increases in cyber incidents.
Supply chain attacks targeting Managed Service Providers (MSPs) and technology clients have triggered large losses globally and these risks continue to be a major threat for insurers. This was highlighted by the recent Kaseya ransomware event which spread quickly across the globe. The threat actors used patches to Kaseya software to install malware on client systems. Experts predict this will be the largest supply chain loss globally. Currently, up to 1,500 organisations are believed to have been impacted, but how many will ultimately be affected remains unclear. The hackers (believed to be Russia-based REvil Corp) have issued a demand for US$70,000,000 in return for a universal decryption tool for all victims.
We expect Australian MSPs and their customers to be impacted by this event, resulting in an increase in claims activity.
We encourage Insureds to continue to work with their brokers in identifying their risk tolerance and agreeing on what will be acceptable from a coverage, price, limit, and risk retention perspective.
As a result of the increase and severity of cyber-attacks, we expect cyber underwriting practices to evolve from narrowly focusing on risk factors such as revenue, the number of employees, Personally Identifiable Information (PII) count, and industry class, to a wider underwriting lens. We anticipate greater reliance on loss modelling tools and continual system scanning, utilising both in-house and outsourced IT security resources as underwriters evaluate prospective Insureds.
As always, we encourage clients to begin the renewal process early and proactively supply insurers with information that improves the perception of their risk exposures.
The Federal Government is considering measures whereby businesses and Government agencies would be required to notify the Australian Cyber Security Centre (ACSC) before paying a ransomware demand. The Bill has introduced penalty measures for entities that do not comply with the reporting framework will be subject to fines of up to $222,000.
There is considerable public discussion about whether ransomware payments should be payable by insurers. Some insurers are now introducing policy conditions requiring Insureds to contribute towards ransomware payments to encourage better risk management and prevention strategies.
The Property & Casualty market remains challenging overall, but we are starting to see a shift towards the end of the June quarter (Q4), especially around pricing and increased levels of competition. Whilst distressed risks (higher risk occupancies, catastrophe exposed, or those with a poor claims history) are seeing rate increases exceeding 25%, reduction in coverage (limits and sub-limits), and limited capacity. We saw pricing increases for 'good risks' during the March quarter (Q3) of between 10% and 15%, however, this reduced to 5% and 7.5% in the June quarter (Q4). In some instances, when further competition was introduced, clients were able to obtain a rollover of rating on expiring terms and conditions. We expect this trend to continue for well-managed risks.
The Casualty segment continues to see further increases in rates (starting at +7.5%) as profitability remains poor and insurers are more conservative in the capacity they deploy. This is coupled with the need for greater levels of Management approval. Overall, limits and capacity remained stable during the last quarter, although bushfire, molestation, and sexual abuse cover, and construction risks with worker-to-worker exposures seeing pricing increases, again due to a contraction, re-deployment of market capacity, and continued remediation of portfolios.
Overseas markets such as Singapore continue to play a crucial role when marketing and placing certain risks. Over Q3 and Q4, our use of the Singapore insurance market has increased due to interest from insurers who are more open to quoting Australian risks to diversify their portfolios.
Insurers remain risk selective as they strive for a balanced and profitable portfolio. We expect pricing increases to continue with insurers still looking to limit and, in some cases, exclude their sideways exposures, these include non-damage business interruption, prevention of access, and communicable disease for property risks, and worker-to-worker exposures in the liability segment. For the larger Australian insurers that are based in Australia, June/July marks the anniversary of their treaty reinsurance, with any changes in underwriting appetite, pricing, and coverage to be better understood over the September quarter (Q1).
Aside from ‘good risks’ where competition is driving down the cost of insurance, pricing increases are likely to continue until there is more consistent profitability in the insurance market. Opportunities for clients to restructure certain insurance programs or introduce co-insurers may also improve pricing. While Q1 is considered a benign period for natural catastrophes in Australia, insurers will be hesitant to accumulate too much risk to offset the impacts of non-modelled catastrophe events such as hail, storms, and water damage.
All States (except for QLD) have applied premium increases to workers’ compensation schemes. The highest year-on-year impact is within NSW, with increases of 1.40% - 1.44% of wages. Find out more here about the changes to workers’ compensation premiums for individual States and Territories. As always, our dedicated Honan Workplace Risk team is mobilised to provide innovative, cost-effective solutions to all clients, and to assist them in achieving premium savings wherever possible.
From 1 July 2021, eligible Victorian workers and volunteers who suffer a work-related mental injury will be able to access ‘reasonable treatment’ and services for up to 13 weeks while their claim for compensation is being determined, regardless of the outcome of their claim. More information about these provisional payments is available from WorkSafe Victoria.
The liability complexities associated with working from home and work-related mental injury claims continue to challenge the insurance market. This, coupled with the mismanagement of accepted claims has resulted in increased premium for clients.
At Honan, we have identified a gradual increase in the prevalence of liability exposures and subsequent claims activity. With this in mind, we are working with our clients on critical injury and illness prevention initiatives. For example, for clients that we identify as having a high risk of claims, we partner with rehabilitation experts to provide physical and mental health webinars and ergonomic assessments.
We encourage clients to adopt a proactive approach in the management of potential injury and illness. This includes empowering management teams to identify potential injuries and register concerns with Honan as early as possible.
NORTHERN AUSTRALIA REINSURANCE POOL PROPOSAL
In May, the Government announced its intention to establish a reinsurance pool for cyclones and associated flood damage, effective July 1, 2022. Backed by a $10 billion Government guarantee, the pool would cover strata, residential, and small business property insurance policies in Northern Australia.
In response to the announcement, insurers and brokers are advocating that a reinsurance pool is unlikely to significantly reduce premiums overall and that the Government should instead be reviewing Stamp Duty and GST charged on insurance in conjunction with the development of a reinsurance pool.
LANDLORDS’ RENT DEFAULT
We have seen a significant influx of broker-distributed Rent Default product options available to Honan. We expect insurers to re-enter the Landlords’ insurance market over the next 12 months and competition to drive lower premiums in 2022.The ending of the Evictions Moratorium on March 28, 2021, has not caused major impacts to Landlords' Rent Default coverage. Real estate agents are expected to remain vigilant in their approach towards tenants’ rental payments, but there is cautious optimism in the real estate market that the worst may have passed. Insurers are slowly returning to the market with rent default products in one form or another.
STRATA EXCESS INCREASES
Many policies are seeing movement in standard excesses from $500 up to $1,000 (with an option to pay extra for an excess buydown). The cycle of excess increases in Strata has been a slow journey – from nil over a decade ago, to $300 followed by a slow increase towards $500, and now $1,000.
We continue to see higher water damage excesses being imposed on buildings with recent water damage claims or reported defects. The excess increases from $500 towards $1000 are intended to reduce the large proportion of small attritional claims lodged for minor repairs or plumbing callout works which often cost $500 - $1,000.
REAL ESTATE PROFESSIONAL INDEMNITY
The end of the financial year is often a time for the insurance market to re-evaluate its position and exposure to risk. Reinsurers and other securities have been more reticent when offering capacity in the Australian Professional Indemnity market for Real Estate Agents. This has been largely driven by the increased occurrence and severity of bodily injury claims relating to property management services and litigation becoming more prevalent in Australia.
UNOCCUPANCY CLAUSES IN COMMERCIAL BUILDINGS
COVID restrictions and lockdowns have taken a significant toll on the retail and commercial sectors, resulting in vacant lots, particularly across urban centres. It is important to remember that if a lot is vacant for 90 consecutive days, insurers must be notified. When a lot becomes vacant, property managers and owners should consider reducing their risk exposures (e.g. installing alarms and security cameras where appropriate).
VIC STRATA LIABILITY LIMIT INCREASES
On December 1 this year, the minimum public liability cover required to be held by an Owners Corporation within Victoria is increasing to $20m. While there are differing views amongst insurers as to how this will happen from a logistical point of view, Owners’ Corporations with less than $20m Public Liability Cover should be mindful of the upcoming changes.
As covered in last quarter’s HoneIn, extensive regulatory changes were enacted by the Victorian Government in March. If you are a landlord and have not already considered the new regulations, we encourage you to do so.
The Strata insurance market continues to harden at varied rates, depending on the sector. Residential Strata premiums are increasing at around 10% nationally and we expect this to continue. Commercial property premium increases are trending higher at 15% - 20% for commercial strata, 5% - 10% for non-strata commercial buildings, and upwards of 30% for industrial buildings with high-hazard activities.
For commercial tenancies, insurers continue to be wary of “high risk” occupations such as tattoo parlours, dry cleaners, recyclers, and restaurants with wok cooking or deep fat fryers over 20 litres.
