EDITION 1. DECEMBER 2018
2017 – 2019: A RECAP ON HOW THINGS SHIFTED | LOOKING INTO 2019: WHAT YOU NEED TO KNOW | KEY SEGMENTS: A CLOSER LOOK
2017 – 2019: A recap on how things shifted.
After almost two decades of favourable buying conditions, 2017 and 2018 saw the beginning of significant change; a change and market dynamic which will continue and accelerate in 2019.
We first witnessed signs of a changing market dynamic early 2017 with insurers altering their underwriting focus to improving profitability.
The protracted soft market, low investment income yields, rising operating costs, growth of third-party litigation funding, robust shareholder activism as well as the drying up of claims releases eventually caught up with insurers–not to mention a spate of natural disasters globally exceeding USD130bn, making 2017 the costliest year on record.
Outside the Property & Casualty sectors, Directors & Officers for example, total claims quantum from known and reported losses exceeded the total insurance premium pool by a significant margin. Underwriting losses were widely common at the end of 2017 and as a result, the broking market witnessed the first successful attempt at a broad remediation plan implemented by insurers in over a decade.
2017 saw the conclusion of the soft market.
Leading into 2018
Insurers found themselves in a challenging position, whereby previous strategies to build market share through top line premium growth were replaced with the need to bolster bottom line profitability. With this approach came a willingness to walk away from business should the underwriting re-calibration not yield acceptable levels of profitability.
We’ve been using the term “multi-speed” to describe the current market given the level of underwriting re-calibration depends on multiple variables:
- Industry Segment
- Product Class
- Risk Profile
- Level of long term pricing discounts applied
- Levels of profitability warranted
Reflecting on 2018
The market has been managing uncertainty.
As 31 December and 1 January global treaty negotiations progressed, there was uncertainty about how the events of 2017 would impact reinsurance outcomes for the 2018 period. Widespread anticipation that the events of 2017 could result in a capital loss to the market thus denting investor returns.
Increased pricing was coupled with other forms of wider portfolio remediation. In the Directors & Officers space, major insurers have either completely or materially withdrawn capacity from the market, whilst remaining insurers reduced their exposure, such as removing cover for Entity Securities Cover (Side C) or through the application of substantially higher Side C retentions.
As was witnessed in the Property & Casualty sectors, prominent insurers demonstrated a willingness to walk away from long-term client relationships if they were unable to achieve the corrections they required.
Adding to the hardening of the Directors & Officers sector, insurers re-assessed their preferred attachment point leading to traditional primary markets electing to attach higher ones, especially on risks that include Side C. For public companies purchasing Side C, the impact is not limited to the first AUD10 million or AUD20 million of cover. Due to the amount and quantum of securities litigation settlements, insurers no longer feel safe at any point of attachment below (circa) AUD50 million, which happens to be the average settlement amount for Securities Class actions.
Looking into 2019: what you need to know.
Downstream repercussions from ongoing industry and regulatory activity feeds uncertainty.
Reverberations emanating from the Hayne Australian Royal Commission, re-submission of Lloyds business plans, Brexit, economic factors and an overactive merger & acquisition environment are all likely to impact the industry. We are already witnessing global underwriting markets in Lloyds ceasing to write certain classes of business such as Professional Indemnity and Marne and we expect this to continue.
Claims pressure arising from the continual growth in securities class actions is likely to be a factor for the foreseeable future pending regulatory change. The Australian Law Reform Commission report into class actions and/or litigation funders is a positive sign but it is not clear what recommendations and changes will be presented. Certainty of recommendations and changes will be further clouded should we see a change in government at a federal level.
Pricing challenges will continue.
We expect to see a continuation of upward pricing pressures throughout 2019, bringing with it another challenging buying year for clients. Insurer risk selection and appetite will continue to drive underwriting behaviour leading a growing rating/pricing gulf between low hazard and less desirable occupancies. Underwriting profitability remains the key performance metric in the medium term as insurers continue to focus on good performing and risk managed business.
To navigate pricing challenges, we’ll continually work with clients to help them clearly demonstrate a robust risk management culture and solid corporate governance. A history of low (or no) claims is also advantageous.
Communication and relationships are pivotal.
Flexibility still exists in the wider market but only if the right messages are communicated – and communicated early. Insurer selection, transparency, relationship management and “selling” your individual risk profile to the market is critical to not only help mitigate prevailing market issues but also to assist your company to stand apart during this market correction.
We are proactively driving the renewal process earlier for clients to allow adequate time to address any surprises or consider strategies which may mitigate underwriting volatility.
Key segments: a closer look.
Record levels of capital remain in the market, emanating from both traditional and alternative means. Whilst the market grapples with capital providers looking for returns, things are quickly balanced up with the need to replenish underwriting profitability thus insurers are still willing to compete hard for attractive low hazard, short tail business. Whilst reductions in pricing are highly sporadic, such competition hampers incumbent insurers ability to shift rating upwards.
Financial Lines underwriters are focussing on (and already been actively remediating) their Directors & Offices portfolio, especially ASX listed entities that purchase Side C cover. Twice as many shareholder class actions were filed in 2017 than in any prior year. Current filings suggest a new high-water mark will be reached in 2018 as evidenced in the graph below1:
Whilst not all clients fit into this category, underwriters are still looking to pass on costs to insureds. Rate increases of 20% (private companies) and up to 300% (listed companies)2 were quoted for renewals ad in some cases, we’ve witnessed more
punitive examples of imposed rate increases which were driven by the extent of premium reductions secured in previous years.
Following the commencement of the Notifiable Data Breaches (NDB) scheme on 22 February 2018 under the Privacy Act, there has been an uptick in the number of data breaches notified to the Office of the Australian Information Commissioner (“OAIC”). By way of summary, the OAIC received a total of 550 data breach reports 3 under the scheme over the first 3 quarters of 2018. In all quarters, the top 5 industries that reported breaches were health care service providers, legal, accounting and management services, finance (including superannuation), education and professional associations or “charities”. In the latest report the source of breaches across all sectors were 57% malicious or criminal attacks such as phishing, malware, ransomware as well as social engineering. The second largest source of data breaches was human error (37%), such as sending wrong recipient via email, unintended release or publication of personal information or loss of documents and 6% from system errors.
The cyber insurance market in Australia is still in its infancy, nevertheless is growing rapidly with all major carriers developing products delivering of upwards of $150M capacity available4.
For more information on anything outlined in the report, please contact your Client Manager.
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It is for general information purposes only and does not constitute legal advice. Whilst every care has been taken as to the accuracy of its contents, it is issued with no implied or express warranty. The information within is subject to change without notice and therefore should be used as a guide only. Honan is not responsible for any error or omission within the presentation and expressly disclaims all liability in respect of any claim, loss and/or damage in relation to the use and reliance placed on this information.