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Stressed Australian D&O market sees 400% rate hikes

Rates for Australian directors’ and officers’ (D&O) insurance are surging by as much as 400 percent as underwriters continue to completely re-rate the territory after years of inadequate premiums.

Market sources told this publication that fourfold increases in rates were common, and the increase could be even higher on loss-hit accounts.

Deductibles have also grown considerably, and insureds can expect to cover up to $10mn of costs in securities class action claims before policies kick in.

The pricing situation is particularly dramatic in Australia due to the ease with which shareholders can bring securities class action cases against companies, and has been exacerbated since the Australian Royal Commission into the country’s financial services sector published its findings earlier this year.

Insiders in the London market said that there had been a significant reduction in available capacity for Australian D&O, and that brokers were finding it increasingly challenging to place risks.

One underwriting source said that in 2014 carriers were writing 100 percent primary lines with a $30mn limit, a retention of around $100,000 and a premium of $85,000. In the current market similar cover would have a retention of up to $10mn and premium would be between $400,000 and $500,000.

“It’s a total transformation,” a market source commented.

Prior to 2017, Australian D&O experienced prolonged soft market conditions due to overcapacity. Given the long-tail nature of D&O and the history of underpricing, insurers are now struggling to meet the costs of claims as they materialise from prior years.

Sources said despite the major rate increases, Australian D&O risk was still pricing below technical rate adequacy.

The legal landscape

A major reason for the jump in rates is the increasing prevalence of class action lawsuits in Australia.

These suits are typically brought by plaintiff law firms on behalf of shareholders following a drop in a company’s share price. They are normally settled out of court.

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In 2012/13, there were 18 new class actions filed, but in 2018/19 the number had risen to 54, according to a report by law firm King & Wood Mallesons.

The same report stated that at least $500mn in settlement funds was approved in 2018/19, the largest being a $215mn payout from Standard & Poor’s and McGraw-Hill companies for various actions. QBE was forced to pay a $132.5mn settlement for a securities class action brought against it.

“The trend shows that Australia is pulling ahead of almost all other countries in terms of active securities class action cases before the courts,” according to a report by Institutional Shareholder Services.

Meanwhile, companies in Australia have a commitment of continuous disclosure to inform markets of any activity that may affect share prices. Firms can also be held liable for deceptive or misleading conduct.

The environment is particularly challenging for financial institutions following the revelations from the Royal Commission.

The Australian government called for a commission in 2017 to examine misconduct in the banking, superannuation and financial services industry.

The commission discovered 19 incidents of potential misconduct, and predicted that charging fees for no provided service could lead to compensation costs of at least A$850mn ($578mn).

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Placing the risk

As a result of the increase in claims severity and frequency there has been a reduction in the number of carriers prepared to write D&O risk in Australia.

For example, in July Allianz Global Corporate & Specialty said it was to cease underwriting long-tail financial risks in Australia and New Zealand due to the claims arising from litigation and class action suits.

As a result, business has been flooding to London. Australian insureds have been travelling to the capital to meet with carriers and brokers, whilst underwriters speak of regularly travelling to Australia to liaise with clients.

“I think we will see more business coming to London. We are trying to be a sustainable and consistent offering,” said one underwriter.

Underwriters in London are seeing such large increases that they can afford to be selective in compiling their books.

“I think there’s a phenomenon where the premiums are increasing so significantly some underwriters don’t think they need to write as much,” one source commented.

Brokers are struggling to place the risk and some of is having to be written in different markets globally, including Singapore.

Market sources did not foresee the rate momentum in Australian D&O slowing next year, and said that price increases needed to continue for the territory to regain rating adequacy.

“I think there will be more increases next year because the loss experience has been so bad,” one underwriter told this publication.

In its most recent report on the Australian D&O market earlier this year, Aon said: “Organisations with very large market capitalisation will continue to see a realignment of base line pricing as relatively modest ‘stock drops’ may translate into large securities class actions.”

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