DIRECTORS’ & OFFICERS’ LIABILITY (D&O) – PUBLIC COMPANIES
The last quarter showed greater signs of stabilisation and we are optimistic this will continue to improve for insurance buyers in 2022. In addition to new capacity entering the market, existing players have increased their appetite for a wider range of risks, which is often required for the market to soften and bring a welcome deceleration in premium increases. The volume of securities class actions in 2021 declined again to 6 for the year which is much lower than peak numbers in 2017 and 2018 of 24 per year. This will improve insurers’ loss ratios, and the regulation of litigation funders and changes to the continuous disclosure laws will hopefully see a continuation of lower-securities class action numbers in 2022, enticing new market entrants for ASX companies.
Whilst rates did increase, the severity of these increases remains much lower than previous quarters, suggesting the corrective portfolio measures required in the D&O space have largely been achieved and pricing is now at a sustainable level for insurers. Some insureds were the beneficiary of rollover (and occasionally, renewal rate decreases) if their industry was unaffected by COVID-19 and they not only performed well financially but upheld exceptional corporate governance. Conversely, companies heavily impacted by the pandemic with signs of insolvency risks continue to experience challenging renewals.
Environmental, Social, and Governance (ESG) issues are becoming more important to investors. The prevalence of ESG related litigation by shareholders and other stakeholders is increasing globally, particularly around failure to meet climate change and diversity targets and focusing on execution of business strategy from an ESG perspective. Boards should take the time to understand ESG-related risks covered under their D&O insurance policies, and whether any exclusions such as environmental-related provisions should be reviewed to reflect their evolving exposures.
Cyber risks continue to be a key exposure for directors, with ransomware attacks increasingly prevalent and severe. Boards will be subject to both shareholder and regulatory scrutiny as to how cyber risks have been managed in the event of a cyber incident.
It should also be noted that insurer appetite for Public Offering of Securities Insurance (POSI) remains strong, with the Australian share market seeing one of its strongest years for initial public offerings in 2021. Insureds exhibiting a profitable track record, strong positive operating cash flow, and who are seeking to use capital proceeds to fundamentally scale (rather than pay down debt) are being looked upon favourably by carriers. With respect to purchasing behaviour, buying patterns have been mixed with insureds either opting for stand-alone POSI or incorporating cover for the IPO/Prospectus under their standard D&O insurance policy.
MANAGEMENT LIABILITY – PRIVATE COMPANIES
While the full effects of COVID-19 continue to be realised, underwriters are cautiously monitoring their portfolios and the solvency positions of Insureds. Employment Practices Liability (EPL), Statutory Liability, and Crime insurance have been under-priced, resulting in corrective measures being implemented on a portfolio basis via increased costs and coverage restrictions for certain industries. Insureds with high exposure to these entity-type claims should consider un-bundling these covers from the Management Liability package and purchase coverage on a stand-alone basis.
Cyber Liability continues to experience the greatest degree of change. In addition to increasing rates and more restrictive terms, buyers will be asked to demonstrate their commitment to cybersecurity risk mitigation as underwriters become more selective and willing to decline or not renew risky accounts.
Manufacturing and wholesale and distribution sectors continue to be particularly challenging areas from a loss perspective. These sectors continue to be targeted by cybercriminals largely due to cyber security immaturity in these industry verticals relative to other verticals. As a result, manufacturers, wholesalers, and distributors have seen an increase in the frequency and severity of ransomware attacks.
We are also witnessing an uptick in attacks for companies operating in the mid-market space, particularly companies with revenues in excess of $50 million.
Insureds need to provide evidence they are prepared for a cyber-attack and have (at a minimum) the following measures in place:
Multifactor authentication (MFA) for all remote access to the network.
MFA for all privileged user accounts (e.g., IT admin accounts).
Offline back-ups that are fully disconnected and inaccessible from the organisation’s live environment or cloud back-ups secured by MFA.
An endpoint detection and response (EDR) solution deployed across all endpoints.
A network monitoring solution to alert the organisation to any suspicious activity or malicious behaviour on the network.
Regularly updating computer systems and carrying out critical patches relating to zero-day vulnerabilities as soon as they are released by the vendor.
Business Continuity Plans & Disaster Recovery Plans implemented. These should be tried and tested at least annually.
The APRA quarterly general insurance performance report (November 2021), reported an industry net profit of $846 million, driven by strong increases in underwriting results, particularly in the Professional Indemnity class. However, we are expecting continued corrections for this long-tail class, with pricing increases expected in 2022. Large accountants, financial planners, lawyers, valuers, mortgage brokers, and construction professionals continue to face supply and demand issues. There is new capacity available in the market in 2022 off the back of improved rates that have been achieved in recent years. This additional capacity will provide more options for buyers and increase competition between insurers.
INFORMATION TECHNOLOGY LIABILITY
The technology sector continues to evolve rapidly, triggering some challenges for underwriters in 2021. The sector (for the most part) remains a profitable class for insurers, and we expect this trend to continue in 2022.
Some areas continue to attract greater scrutiny than others. The following is a non-exhaustive list of those requiring greater attention and longer lead times to enable a successful renewal cycle:
IT/Cyber security services
High revenue % being generated from government contracts
Trading platforms/online exchanges (stock exchange or online securities trading platforms)
Mass transport/public transport exposures
Social network platforms
If your business falls within any of these categories, we encourage you to begin discussions early with your broker to ensure a plan is mobilised well before the renewal date. Many cyber risks will fall within these renewal programs, so we encourage reference to the cyber minimum controls (outlined above) in submissions.
In Q2 FY22, the Financial Institutions (FI) insurance sector held up well notwithstanding COVID-driven market volatility. Insurers have shown a preference for insureds with a wholesale sophisticated client base, with those servicing the retail sector incurring stricter underwriting practices due to higher regulatory exposure. While the general outlook for the space is favourable, uncertainty around the impact of potential COVID variants on portfolio performance remains. This, alongside other factors such as soaring inflationary pressures, rising interest rates, and supply chain disruption are likely to be focal points for underwriters in reviewing fund asset allocations and, ultimately, making decisions on capacity deployment and premium.
OUTLOOK FOR Q3?
Businesses that take time to demonstrate the strength of their risk management practices and culture will continue to realise the greatest benefits. Insurer meetings are critically important, enabling insureds to build rapport with underwriters and communicate the individual characteristics of the company.
Underwriters will continue to focus on quality risks. Companies that continue to address their risks and maintain a focus on their risk profile will be the first to benefit from this market improvement.
As always, engagement well in advance of renewal dates is required. A considered plan and clear timeline will help to guide all parties through a more successful renewal.
Protecting cash flow, guarding against late and/or non-payments from customers, and securing your company’s own creditworthiness is critical to business sustainability. This article looks at two key ways you can limit your liquidity risks: credit reports and trade credit insurance.
Honan Insurance Group Pty Ltd (Australian Financial Services Licence no. 246749, ABN67 005 372 396) is an insurance broker acting as agent for insureds and intending insureds. Honan is not an insurer. The information on this website has been prepared without taking into account your objectives, financial situation or needs. Any advice provided on this website is general advice only. Before making a decision to purchase an insurance policy, please read the relevant Product Disclosure Statement to make sure the policy is right for you. Insurance cover is subject to policy terms and conditions including policy limits and exclusions.
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