Directors & Officers insurance market update
D&O insurers of ASX companies have implemented remedial underwriting strategies and continue to tread cautiously when deploying capacity in an attempt to deliver a substantial uplift of the Australian D&O premium and profit. Insurers are taking this action in the face of on-going profitability issues originating from the Australian securities class actions and other significant claims activity.
WHAT YOU NEED TO KNOW
SIDE C cover provides cover for the company itself, as distinct from its directors and officers, in relation to claims arising from wrongful acts associated with the offer, sale or purchase or trading of its shares or securities (i.e. shareholder class actions).
WHAT HAS CAUSED THE D&O MARKET TO DETERIORATE
- GFC saw an influx of capital into the insurance market seeking higher returns however the competition for market share pushed premiums and deductibles lower;
- Royal Commission into Banking, Superannuation and Financial Services Industry;
- very active class action environment against ASX companies;
- high claims costs (in 2018 the top three securities class action – Centro ($200 million), Aristocrat ($144.5m) and QBE ($132.5m);
- Australia is one of the most litigious jurisdictions outside the USA;
- a deteriorating claims environment; and
- the availability of litigation funding in Australia.
PREMIUMS & DEDUCTIBLES
Due to significant pressure on loss ratios (i.e. higher claims costs), insurers are looking to increase premiums and deductibles as well as taking a much more prudent approach to underwriting.
Sub $70M limits have been the subject of significant premium increases i.e. between 70% – 400%.
Capacity from insurers has also declined particularly with respect to Side C cover with the maximum capacity from some insurers reducing to $5M to $10M. Deductibles have also significantly increased.
Most ASX insureds should expect minimum deductibles for Side C cover of $250,000 to $1,000,000 any one claim.
Excess insurers are also responding because they are now experiencing securities class claims hitting their levels of cover and so are pricing cover higher as well.
The changes in the market has placed an increased importance on insurer selection, particularly excess insurers because the excess insurers have a significant say in the conduct of claims and so excess insurers’ experience in handling these types of claims must be taken into consideration.
WHAT YOU NEED TO DO
We recommend insurance renewal planning commence early to ensure that an informed strategy for renewal of D&O be agreed and early market engagement undertaken. Given the upward pressure on pricing, insurers are seeing a significant increase in the number of submissions, which in turn has created congestion with insurers.
Early engagement with the insurers together with face-to-face meetings, where appropriate, are essential to differentiating risk profiles and ensuring best outcomes.
Renewal strategy discussions should consider reassessing adequacy of limits (Sides A, B + C) purchased as well as the appropriateness of ring fencing those limits so to protect directors from non-indemnified loss.
HOW WE CAN SUPPORT YOU
McCullough Robertson and our insurance advisory service, Allegiant IRS, can assist you with ensuring directors’ Deeds of Indemnity, Access and Insurance are drafted in concert with your company’s D&O insurance obligations. We can also guide you through the process of placement and renewal strategy of the D&O insurance program that strikes the right balance of risk transfer and retention in line with your company’s appetite to risk.
For further information, please contact our below authors.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.