The threat of shareholder class actions and the fallout from the Hayne Royal Commission has fuelled spiralling growth in insurance costs for Australian company directors and finance professionals, a report from insurance broker Marsh has found.
Australian insurance premiums rose faster than anywhere else in the world last year, the Global Insurance Market report revealed, as the cost of taking out directors’ and officers’ liability insurance (D&O) or financial services professional indemnity insurance (PI) doubled in 2019.
In the fourth quarter alone, there was a 32.5 per cent jump in premium costs from a year earlier – the seventh straight quarter where pricing rose by more than 20 per cent.
Companies are now spending up to $5 million – more in some industries – to buy D&O coverage of $100 million to $200 million, whereas several years ago the average cost topped out at $800,000. The excess in many policies has also climbed, sometimes above $100 million, shunting risk back onto directors.
The spiralling cost for directors and executives to protect themselves against class actions has generated what Marsh has called a “perfect storm”: “greater risk, higher premiums, lesser coverage, increased retentions and lower limits”.
The two-year surge in premiums has been “directly caused by the volume and expense of shareholder class actions in this part of the world”, said Craig Claughton, head of the financial and professional services practice at Marsh JLT Specialty in Sydney.
“The Australian D&O market was extremely competitive for a long, long period,” he said. “Insurers have known that they’ve been too cheap for the risk environment, but the competition in the market has kept prices at this unrealistic level until about 18 months to two years ago when the insurers said ‘enough is enough’ – and prices have pretty much gone through the roof.”
Mr Claughton expected the price surge to continue, given the huge gap between the size of the class action claims and the amount of insurance now being taken out.
“On average we have abut 20 new class actions in Australia each year, and the average cost of a class action is between $50 million and $60 million; and then if it does go to trial, you’re looking at $10 million to $15 million of defence costs,” he said.
“So if you extrapolate that out, you get to a number that’s at least $1 billion. The total premium pool for directors’ and officers’ liability in Australia at the moment is somewhere between $500 million to $550 million. It just doesn’t make sense.”
He said the situation would only change if the government stepped in to regulate the activities of litigation funders and plaintiff lawyers. The legal framework creates an environment where lawyers launch class actions not with the intention of going to court, but of pushing the target company into a settlement.
“The real nub of the problem is that the government has no desire or willingness to change the legislation, so that environment is not going to alter.”
On the professional indemnity side, the dynamics are similar: the Hayne inquiry has exposed the extent of claims and diminished the willingness of insurers to carry the risk at such low cost.
“The losses suffered in this part of the world are starting to outstrip the premiums that the insurers were charging,” Mr Claughton said.
The brunt of the challenge was in banking and wealth management, but it could spill over into higher professional indemnity costs across the board, he said.
“Inevitably what happens with an insurer is that if their portfolio is running bad or running at a loss then they apply increases right across the portfolio. Sometimes you may not have had a loss or been in a bad industry but you get brought along for the ride.”
The only other market that came even close to that kind of increase was Britain, where liability insurance rose 27.8 per cent – only the third straight quarter of double-digit growth – and the US, on 15 per cent.
“The London market insurers, they are a client base where they have clients from multiple different jurisdictions coming to London so they are impacted by the litigation environment for Australian clients, US clients and many other jurisdictions,” said Beth Thurston, head of management liability for the UK and Ireland at Marsh JLT Specialty.
“There has also been a change in the regulatory environment on a global basis since the financial crisis, such that insurers in London are now also seeing an increase in regulatory matters, formal investigations, internal investigations, which are also impacting the profitability of that portfolio in London. The insurers are continuing to re-evaluate the quality of those portfolios to ensure they are sustainable going forward.”