While the financial markets continue to be underwhelming, the Financial Institutions (FI) sector remains stable with decreasing inflationary expectations, the interest rate environment potentially easing, and liquidity slowly entering the insurance market.
Directors & Officers Liability (D&O)
After we ended the financial year with the D&O insurance market showing clear and consistent signs of softening, it continues this way as we come to the end of Q1. Decreasing premiums continue to be the norm as we see an increasing supply of insurance capital from new local and overseas insurers providing competitive tension against existing providers. This momentum is expected to continue for the rest of the year. Unlike the previous quarter, there are positive signs in the capital markets as liquidity is increasing and companies are successfully raising funds. This might lead to more stable premiums in the future as underwriters see insurance requests growing.
Similar to last quarter, average premium reductions remain consistent at ~10% across our portfolio with premium decreases for large accounts and improved coverage for quality risks. Although underwriters are still cautious when it comes to public company market D&O insurance, pricing and coverage remain consistent with discounts achievable on quality-rated accounts.
There has also been a stronger leaning towards the insurance market in London for Side A Difference in Conditions (DIC) placements. Side A DIC insurance provides excess coverage for directors when the underlying D&O insurance is eroded. The policy also provides coverage when claims are excluded by the underlying D&O policy. The predilection towards London is namely due to syndicates releasing more favourable wordings and coverage options in comparison to their Australian counterparts, not to mention more competitive pricing.
Key areas that impact the D&O underwriting process:
- Cyber risk management has never been more important. The cyber-attacks targeting Optus and Medibank made underwriters extremely cautious when it comes to cyber operational adequacy
- Cash runway is crucial. Despite capital market liquidity improving, the credit climate remains constrained.
- Due to increased capital raising activity and underperforming financial markets, underwriters review capital raising documents with a fine-tooth comb to understand the nature and extent of representations made to the market
- The backlog of securities claims could have longtail effects on technical premium rates and capacity deployment, even when an individual account has the ideal risk profile.
‘’The industry segment, location, loss experience, market cap, and financial health of your company factors that will always play a part in the underwriting process."
The Financial Institutions (FI) sector remains stable despite the financial markets continuing to be underwhelming. With decreasing inflationary expectations, the interest rate environment potentially easing, and liquidity slowly entering the insurance market, underwriters now look more favourably towards FI sector risks. This means more competitive pricing and the allocation of insurance limits being a by-product. Offshore insurance markets like London still broaden their risk appetite and sharpen their pricing, stimulating more competition in the Australian market.
Similar to last quarter, underwriters are still cautious of the macroeconomic conditions and will scrutinise risks on a case-by-case basis despite the general financial market outlook being more positive.
Key areas that impact the FI underwriting process:
- Fintech cash runway is crucial as several FinTech’s have recently wound up despite having robust business models and positive performance trajectories in place
- Cyber operational resilience will be a key focus for underwriters, given ASIC (as part of its strategic four-year strategy 22-26) will be honing in on institutions with lax cyber risk controls
- Funds with a high allocation to Web3 (open-source applications powered by blockchain) or cryptocurrency-related exposures have been reviewed by underwriters with extra caution due to their highly volatile nature
- ESG-related claims will be put under the microscope because of the increasing level of claims in this space
- Underwriters will intensify their scrutiny of AFSL holders who rent out their licenses to Corporate Authorized Representatives (CARs). There have been liability claims against insurers due to inadequate supervision of CARs, prompting a greater emphasis on proper oversight, risk assessment, and controls by AFSL holders
‘’Most financial services claims come from banking misconduct or frozen redemptions in asset property funds.’’
“The entrance of new, specialised PI insurance providers has helped to create a more balanced pricing environment.”
As loss costs and exposures in the insurance industry remained consistent, this continued to push pricing marginally higher overall. However, the entrance of new, specialised PI insurance providers has helped to create a more balanced pricing environment and, in some cases, reduced rates where strong risk management and the quality of risks have been demonstrated.
There was a growing emphasis on distinguishing different levels of risk in the underwriting process, and achieving better outcomes relied heavily on having thorough and reliable underwriting information, especially concerning measures to reduce risks.
We observed deductions on excess layer premiums, predominantly driven by new capacity entering the Commercial PI market. Primary markets continued to roll over, where strong risk management practices could be demonstrated.
Design & Construct PI remains a challenged class, particularly in the construction sector where insurers are risk-averse, and premiums are high.
“In positive news, insurers increased limits, broadening their scope of coverage, and easing some of the previously imposed restrictions during renewals.”
Over the first quarter, the cyber insurance market continued to soften in favour of insureds. This was driven by improvements in insurer loss ratios and the influx of new capacity. In further positive news, insurers increased limits, broadened their scope of coverage, and eased some of the previously imposed restrictions during renewals.
Despite these changes, underwriting standards have remained stringent, focusing on factors like risk maturity, controls, and the collection of biometric information. Special attention was given to areas such as Operational Technology, Supply Chain Risk, and the volatile geopolitical situation in Eastern Europe. Insurers were particularly careful when offering coverage for critical infrastructure and events with systemic or correlated impacts.
It is likely that small-to-medium enterprises (SMEs) with revenue under $3M, will no longer be exempt by regulators under the Privacy Act, facing new obligations around the handling of personal information. If this change comes to pass, SMEs will need to be aware of and ensure minimum cyber security levels are embedded within their businesses to help protect client data.
The sustained improvement in pricing was influenced by heightened competition, enhanced cybersecurity measures, and a decline in ransomware incidents in 2022. However, the second quarter saw a rise in reported ransomware claims. Ongoing reductions in excess layer premiums also contributed to the overall decrease in program pricing.
In general, coverage expanded and in some instances, we saw the removal of coinsurance obligations and increased enhancements to sub-limited coverage. Insured parties that could demonstrate strengthened cybersecurity measures were typically able to negotiate lower deductibles.