Tuesday, October 18, 2022

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FY23 Q1: Financial Lines Market Update

Insurers are more focused on new business and growing their portfolios following improved loss ratios which were achieved from the portfolio remediation activities over the past five years and increasing competition in the marketplace.  This has resulted in buyer-friendly market conditions for Professional Indemnity (PI) and Directors & Officers (D&O) classes, especially for high-quality risks. We have witnessed a deceleration of PI & D&O rate increases due to new market entrants and corrective portfolio measures, with rates now closer to flat and the potential for decreases on excess layers. Insurers are typically comfortable with current capacity and limit attachment points, and they are more open to removing coverage restrictions applied during the hard market.  

The volatile financial markets have significantly slowed IPO activity in 2022.  D&O Insurers that saw a wave of new business in the 2021 IPO boom are now looking for other growth opportunities, and publicly traded D&O insurance buyers are enjoying the benefits of this increased competition.

Cyber is the exception to these trends, with the intensifying hardening market conditions over the last three quarters expected to continue through 2022.  Major markets have reduced their maximum lines from $10M to $5M in many cases. Rates for corporate risks have increased up to 80% and insurers are focusing heavily on ransomware controls and the quality of vendor support services before providing cover.

The recent Optus cyber-attack is a wake-up call for all companies in Australia. While the incident is still unfolding, it is clearly significant and has the potential to be the largest attack in Australia with up to 9.8 million customer records compromised. Slater and Gordon is investigating the initiation of proceedings against Optus, on behalf of current and former customers who have been affected by the unauthorised access to customer data announced on 22 September 2022. If proceedings are taken against Optus, this would be a landmark case and the first major data breach class action in Australia.

Working closely with a broker to demonstrate the strengths in your risk profile will help to achieve a more favourable outcome in the current market conditions.  While the entrance of new capacity into the market provides more choice, it is important for clients to recognise the support their existing panel of insurers provided during the peak of the hard market (when others may have declined) and to consider longer-term program sustainability vs short-term premium savings, particularly for complex placements.

As we approach the end of the calendar year, it is critical to access the large pool of capacity sitting within the London market for specialist and harder-to-place risks before insurer binders are filled closer to December. This is a timely reminder for clients to engage with brokers early to ensure capacity can be canvassed. Lloyds of London syndicates have been hungrier for new business in certain product lines throughout 2022.

Moves to dismantle the Coalition’s changes to the class action framework have commenced, with the Labour government intending to remove regulatory oversight for litigation funders before the likely introduction of contingency fees. Draft regulations have now been released, meaning if they are approved, funders will not be required to hold an Australian Financial Services Licence (AFSL) nor comply with the rules for Managed Investment Schemes (MIS).   Whilst there is a view the removal of the AFSL/MIS regime may encourage more funder-backed class action activity; we strongly believe the D&O insurance market has the means to contend with such changes. Insurers have spent the last five years correcting their D&O portfolios through considerable premium and deductible increases, meaning the industry segment is in a much stronger position to sustain losses. You can find out more about the move to undo the Coalition’s changes to the class action framework and what this means for the D&O insurance landscape in our recent update.

ASIC has released its strategic priorities for the next four years and its plan of action for the year ahead. We encourage all AFSL holders to review these core strategic projects which focus on sustainable finance practices, crypto-assets, scams, cyber and operational resilience, breach reporting, design and distribution obligations, and subject to the passage of legislation, the Financial Accountability Regime

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Honan Insurance Group Pty Ltd is now fully owned by Marsh Pty Ltd. To find out more, speak to your broker or read the announcement