Monday, February 13, 2023

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FY23 Q2: Financial Lines Update

The overall financial lines premium pool increased by 20% annually to $5B in 2022. For the first time in many years, the market is now broadly returning to profitability. The reported Combined Operating Ratios (CORs) of leading insurers have improved consistently across the market, reporting net CORs of 80%. Because of the new capacity selectively entering the market, risks are increasingly becoming divided into two tiers; those in profitable sectors where there is a clear appetite for insurers to grow again and others where there is limited to no competition on pricing and restricted capacity. Industry sectors that have low loss ratios and buyers that experienced the highest rate increases over the last few years were the first to see the benefits of a softening market during the last quarter.

From a claims perspective, overall reported financial lines’ gross loss ratios vastly improved to 65% in FY22 for Australian insurers (100% in FY21). Insurers will need to delicately manage the transitioning market as sustained inflation, higher claims and expected rate reductions could put pressure back on profitability.


Directors & Officers Liability

In Q2 we saw renewal pricing continue to transition away from increases for primary layers on Directors & Officers (D&O) liability coverage for publicly traded companies to flat renewals. When competing insurers can be leveraged, premium reductions are increasingly achievable, particularly on excess layer programs.  Due to a low level of transaction business, including IPOs, insurers were behind on their year-end budgets which resulted in competitive pricing and favourable buying conditions. We expect reductions in premiums to become prevalent for certain renewals throughout 2023 due to strong competition from both legacy insurers and new entrants.  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.


Management Liability programs (private enterprise) experienced moderate rate increases in Q2. The corporate entity coverages including Crime, Employment Practices Liability, Statutory Liability, and Tax Audit continue to trigger most claims. We expect new market entrants in 2023 which should increase competition and stabilise renewal premiums.


Professional Indemnity

We witnessed a two-tiered market across a significant portion of the Professional Indemnity (PI) landscape, with in-appetite professions targeted for insurer growth experiencing flat or decreased pricing with plenty of competition from Australian PI insurers.  Challenging, poor-performing, or out-of-appetite risks (e.g., large Accountants, Financial Planners, Lawyers, Valuers, Mortgage Brokers, and Construction professionals) continue to experience increased rates and capacity restrictions, although these conditions have moderated from previous periods.


The market for larger construction clients and projects has further retracted with some insurers advising that they are unable to support large clients’ annual insurance programs and pulling out of the Project Specific PI market altogether.



Cyber premiums increased significantly in 2022, however, so has clients’ risk tolerance around cyber security. In 2023 we expect clients to focus their attention on cyber security practices, more than previous years. Insurers have begun to calibrate underwriting and pricing strategies on an account-by-account basis rather than on a portfolio basis. Insureds with strong cybersecurity controls may experience stabilising pricing if they have previously experienced significant rate adjustments. Insureds lacking basic cyber hygiene practices can expect continued premium and retention increases, coverage restrictions, and/or overall insurability challenges.


Greater scrutiny around risks, increases in premiums and deductibles and reduced limit deployment has put the market in a much more sustainable position. Insurers have improved their underwriting techniques, which will need to continue to evolve as the risk landscape changes.


Regulatory Updates

In the aftermath of major data breach incidents involving Optus and Medibank, the Australian Government moved swiftly, introducing a Bill enhancing the privacy regulator’s powers and increasing penalties under the Privacy Act 1988 (Cth).


Australian privacy laws have been strengthened with the Privacy Legislation Amendment (Enforcement and Other Measures) Bill 2022 (‘The Bill’, or ‘The Act’), which was passed by Parliament on 28 November 2022, with amendments coming into effect on 13 December 2022.


The amendments increase the maximum penalty for corporates with serious or repeated privacy breaches from the current $2,2M to whichever is the greater of the following:

  • $50 million;
  • If a court can determine the value of the benefit that the corporate (and its related corporations) directly or indirectly obtained from the contravention – 3 times the value of that benefit; or
  • If the court cannot determine the value of that benefit – 30% of the adjusted turnover of the corporate during the breach turnover period (minimum 12 months) for the contravention.


The Australian Securities and Investments Commission (ASIC) has put directors and executives on notice,  suing 11 Star Entertainment officers for alleged failure to “significantly focus” on risks in its casinos.


Environmental, Social, and Governance (ESG) risk exposures may start to shift again in 2023. Shareholder actions against companies and their directors and officers relating to ESG risks may arise as new regulations come online and political debate around ESG issues intensify.  We expect formal disclosure guidelines on environmental risk disclosure to become law for publicly listed entities. 

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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