Wednesday, April 28, 2021

Return to listings

Market Update: Q3 FY21

Discover our forecast of insurance trends and business implications in the quarter ahead across the following sectors:



By Henry Clark - Head of Professional & Executive Risks


In Q3 we started to see more consistency and certainty around insurer appetite for Professional and Executive Risks. Whilst insurers continue to press for increased premiums and deductibles, the severity of increases are not as high as previous renewals as insurers start to reach a viable tipping point, particularly for ASX Directors & Officers (D&O) placements.

Cyber risks surged locally and globally over Q3, which has led insurers to reposition pricing and coverage. Two significant cyber-attacks hit the press - the Nine Network attack which disrupted live broadcasts and the cyber-attack on Microsoft Exchange, which breached over 100,000 Exchange Servers. Microsoft released emergency security updates in March to address server vulnerabilities. Insurers expect Insureds to have implemented effective patch management programs as part of the firms’ broader cyber security strategies to provide coverage.

For financial institutions, global economic volatility presents a concern for insurers. With the resurgence in Australian capital markets now floating on an unprecedented level of monetary and fiscal support, investors are sitting on large cash reserves and rapid accelerations in equity gains. As a result, underwriters are concerned about sudden devaluations to the market and consequent investor legal suits. The lingering effects of the Hayne Royal Commission also remain an integral rating factor, as well as any potential long tail claims arising from COVID-19. You can find out more in our early April Financial Institutions market update.

Forthcoming insolvency warnings are among the top concerns for the Management Liability insurance sector with insolvency administrators typically looking to recoup losses from directors. Following the end of COVID-19 Government support packages, SME and private enterprises are being examined for solvency risk and can expect greater scrutiny at renewal time to cover this exposure.

After a tough year in 2020 for Australian mergers and acquisitions, there is cautious optimism about the year ahead. Mid-market deals that were put on hold due to COVID-19 will now progress and the acceleration in capital markets will likely prompt owners to test the waters. Warranty and indemnity insurance continues to have an accelerated take-up in the Australian mergers and acquisitions landscape.


For Q4, cyber insurance rate increases are anticipated across all industry classes after a notable acceleration in claims. With the global pandemic serving as a catalyst, cyber criminals have taken advantage of new and exposed vulnerabilities to target companies’ most valuable resources – their intangible assets (such as data, brands, customer and supplier information, content, code, trade secrets and industrial know-how).

Ransomware claims have increased significantly in both frequency and severity. According to Chubb, ransomware claims accounted for up to 78% of their value of losses incurred during 2020.

A number of cyber markets have flagged that coverage will be restricted for companies with inadequate security measures, while others may decline to offer terms altogether under new underwriting guidelines.

The impact of the SolarWinds cyber attack that spread to clients and went undetected for months will also have critical implications for cyber risks going forward. The Trojan Hack that gained entry via a software update could not only cost cyber insurers AUD$116 million, but could also improve hacking tools for cyber hackers.

In general, insurers expect comprehensive underwriting submissions across all financial lines products to ultimately provide clients with the best price, terms and conditions for their risks. Early engagement with your Broker well in advance of renewal dates is required to achieve optimal outcomes.


The COVID-19 Continuous Disclosure relief for ASX Listed entities has now lapsed. Whilst the Bill has passed through the House of Representatives, this has now been referred to the Senate Economics References Committee (SERC) and ASX entities must continue to act with caution regarding their continuous disclosure obligations.

The proposed Bill outlines various changes to ease the continuous disclosure rules which would raise the threshold to lodge claims, and potentially aid the Directors & Officers (D&O) market. The SERC must report by June 30, and the Senate is expected to debate the Bill in the first Parliament sitting for August 2021.

Clients in the construction industry may have new obligations under the Design and Building Practioners Act (DBA) 2020. Although the Act came into effect on June 11 2020, new details have now been released by The Design and Building Practitioners Regulations which commence on July 1, 2021. The DBA Act which applies to Class 2 buildings and buildings that include class 2 components such as “two or more sole occupancy units, each being a separate dwelling” will now be subject to an industry-wide statutory duty of care along with a number of proposed compliance reporting and registration requirements. The statutory duty of care operating on a retrospective basis is one of the most notable changes to watch over the coming quarter. Given the retrospective element, clients could face litigation relating to work performed years ago. Building and Construction clients should ensure they are well-informed about the changes.


By Travis Wendt - National Head of Corporate Insurance & Risk Solutions


The insurance market was again tested by two significant events in the period January - March 2021 (Q3).  Declared ‘Catastrophes’ by the Insurance Council of Australia (ICA), the Perth Hills bushfires (February), followed by the floods impacting large parts of New South Wales and SE Queensland (March), once again forced property insurers to reduce their exposure to extreme weather perils.  As reported in our FY21 Q2-Q3 edition of HoneIn, such corrections take the form of reduced capacity to insure against risk, sub-limits for hail, bushfire, flood and windstorm, alongside continued price increases and higher deductibles.  

In early March, the Australian Prudential Regulation Authority (APRA) released its Insurer performance statistics for the year ending 31 December 2020.  The results did not bode well for insurers, with Net Profits After Tax falling 98.9% from $3.1bn to $35m in comparison to the same time last year.  This dramatic reduction has been driven by natural catastrophes, provisions for COVID Business Interruption losses, as well as continued declines in investment income.


Q3 is typically a strong indicator for the quarter ahead. From the 2021 results to date, we anticipate a continuation of:

1. Pricing increases between 5-15% for non-catastrophe exposed risks and 20%+ for catastrophe-exposed risks such as floods, cyclones and bushfires

2. Reduced capacity to insure assets located north of the 25th parallel and in regional/bushfire exposed regions.

3. Non damage Business Interruption extensions (closure by Public Authority, Prevention of Access and Public Utilities) to be further sub-limited or excluded altogether

4. Infectious Disease exclusions

5. Cyber and Electronic Data exclusions.

Pricing and capacity appear to be stabilising somewhat for high hazard sectors (food & beverage and EPS building material) as competition gradually increases, while rapid rate rises over the past four years will see some insurers willing to re diversity and/or redeploy capacity for a short-term return.  This being said, underwriters are likely to remain incredibly conservative and will require Management referral approval.

FY21 Q4 is also reinsurance treaty negotiation season for the larger Australian Insurers.  We expect the impacts of a realignment of underwriting protocols, appetite, and capacity deployment to be felt in July-August.  If the 31/12 and 01/01 results are any indication, capacity will remain stable with any upward pricing likely to remain orderly.


With the market remaining volatile, insurers will continue to be highly selective about taking on risk.  Further aversion to certain perils by insurers will likely result in clients having to continue to fund such exposures via their own balance sheet protection, or alternative means such as parametric risk transfers or captives - owned or rented. While often seen as an unconventional form of risk transfer and financing, these options are becoming increasingly popular among medium sized corporations.

Furthermore, increased levels of competition are being witnessed in the Asian market via Singapore. While the Australian market remains fixated on reducing exposure to risk, appetite exists for some Asian markets to diversify their underwriting across varied sectors and industries.  There is also a willingness to look at offering capacity in medium to high catastrophe zones.


By Sharon Rutherford - Head of Risk Consulting


Now that JobKeeper payments have ceased and many businesses are operating within the ‘new norm’ of COVID-19, employers will need to consider the impact this will have on projected wage rolls for FY22. Ultimately, any changes to the balance sheet must be reflected in their FY22 insurance policies ahead of June 30 renewal season. Furthermore, with premiums driven by claims performance, clients should begin working more closely with their Broker/Claims Agent to optimise outcomes as we head into 30 June renewal season.


During the 30 June 2020 renewal season, most regulators excluded JobKeeper payments from premium calculations and held off passing on proposed industry rate increases. This year however, regulators are reviewing their position on this.  In New South Wales for instance, regulators have announced premium increases of 1.4% to 1.44% of wages for FY22, with the intent to increase this year on year for the next two years. For employers who struggled during COVID and who are seeing a deterioration in claims performance, this will potentially have significant impacts to premiums. Many employers in NSW had a similar experience in 2016 when icare introduced its new premium methodology, resulting in premium increases exceeding 30%.

Regulators in Western Australia have also confirmed a 4% increase in the 2021/22 recommended premium rates for compulsory workers’ compensation insurance. This translates to 1.7% of total wages (up from 1.64% in the previous year).

Finally, while Victoria is yet to release its premium rates, it has been confirmed that for the FY22 policy year, the premium window for 21/22 premium sensitive claims will be 3 years from January 1, 2018 to December 31, 2020. However, the last 12 months of that experience period (claims received between January 1, 2020 to December 31, 2020), will NOT have a statistical claims estimate (SCE) applied, or any medical and like expenses included.  Furthermore, only actual weekly compensation payments will be used. All of this will have a significant impact on employers with developing claims with a high SCE. The full SCE claim experience will be realised in FY23.


Now more than ever, it is critical for clients to work closely with their Brokers to understand changes to their premiums, and whether they are likely to be impacted by industry rate changes being imposed by regulators.

As always, Honan is ready to assist with any queries you may have about changing premiums, and the potential implications for your business.


By Kieran Drum- National Head of Strata
Matthew Henderson - Operations Manager: Underwriting Facilities & Strata


Following the Eastern Australian floods in March this year, the strata insurance market was again affected by a natural catastrophe in Q3. While it is still too early to determine the full extent of damage resulting from this latest disaster, an estimated 30,000 claims will be filed at a cost exceeding ~$500m.

Reinsurance treaties for strata and private real estate insurers tend to operate along calendar lines and are under considerable pressure after the bushfires of 2019-20, and COVID-19 in 2020. Thus, last month’s floods are likely to result in further rate increases across the market.

While insurers endeavour to take a long view of losses and profitability, the events of Q3 will negatively affect the rating environment across the property sector at large. At present, residential strata premiums are increasing at around 10% nationally, and we expect this to continue. Commercial property premium increases are trending ever higher, at between 15-20% for commercial strata, between 5-10% for non-strata commercial buildings, and upwards of 20% for industrial buildings.


Commercial strata insurance continues to face challenges

While there are currently around eight insurance solutions in the residential strata space, there are only three competitive markets willing to quote the bulk of commercial strata risks. A drastic contraction in reinsurance availability, together with a lack of appetite to write higher risk commercial buildings has resulted in insurance premiums increasing by upwards of 20% for high hazard commercial spaces. Liability concerns in addition to poor housekeeping by tenants continues to contribute to the rising cost of commercial strata insurance.

A tough market for small strata buildings

Not all strata insurers are focusing on actively writing new business for buildings below $2m building sum insured; this is due to the excess/deductible being as low as $500 which makes this sector relatively unprofitable for insurers due to numerous small claims.

Some insurers in this small building category are looking to increase excess/deductible upwards to $1,000 or $2,000 to remove small losses caused by minor accidents and water damage claims. This is also seen as a prudent approach for many owners who will not incur large premium increases due to a multitude of small claims on their claims history.

Medium strata buildings a highly competitive market

Nationally, most strata buildings have a building sum insured between $2m and $10m, making this space highly competitive amongst insurers for “clean risks” (no claims history, no flammable cladding, no asbestos, of the right age, no defects, and no high-risk commercial tenancies). Clean risks may start seeing some reprieve after several years of rate increases. Owners can expect slight rate increases of <5%, or even minor reductions for some buildings. It is expected that buildings outside this category will continue to see rate increases in Q4.

Promising signs for large strata building owners

Over Q4 we expect to see promising signs for owners of larger buildings over $10m building sum insured that are well managed and away from catastrophe zones. There will still be rate increases for buildings with poor claims histories, outstanding defects, or flammable cladding.

Landlords’ insurance reprieve

We anticipate more insurers will re-enter the Landlords’ insurance market to offer Rent Default that was impacted heavily due to the Government’s introduction of an Evictions Moratorium. This moratorium ended in March 2021 and to date, the rate of Rent Default and Hardship claims in the Landlords’ insurance industry has been stable.


To set minimum standards for rental properties and strengthen tenants’ rights, the Victorian Government enacted a raft of new rental regulations (132 in total) on March 29, 2021. Landlords must be aware of these changes, as they may need to action upgrades to properties as a result (which should be considered when budgeting for future property maintenance).

Within the reforms are a set of minimum standards that include the provision of:

  • Working toilets and door locks
  • Three-star showerheads
  • Vermin-proof rubbish bins
  • A working stovetop
  • Food preparation area and sink in the kitchen.

Landlords must also ensure:

  • Tenancies are free of mould
  • Have appropriate lighting and ventilation
  • Have energy efficient heating
  • Appropriate gas and electrical safety checks are conducted (for tenancies starting on or after March 29, 2021).

Under the changes, tenants may now install picture hooks, shelves, and child-safety devices without consent from their landlords. In addition, tenants can no longer be asked about previous rental disputes, or if they have ever had a claim on their bond.

Read more from this issue of HoneIn:

Meet BRIC CEO – Chris Bovill

Where we've been showing up for our Partners

Return to listings