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Australian FI business moves to London after misconduct investigation

The London financial institutions (FI) market is seeing a wave of new business following the Australian Royal Commission into misconduct in the country’s financial services sector.

London market sources said the withdrawal of local Australian capacity had encouraged the flow of FI business to the London open market, particularly small to medium-sized accounts. Many Australian coverholders have also seen their capacity withdrawn, it was suggested.

FI claims typically take around five years to come to fruition, however underwriters said premium rates on Australian business were already rising rapidly in anticipation of a sharp increase in claims severity.

One source suggested he had seen premium rate rises on Australian FI bundles ranging from 75 percent to 150 percent.

The Australian government first ordered an inquiry into misconduct in the banking, superannuation and financial services industry in December 2017.

On 1 February this year, the final report from Commissioner Kenneth Hayne QC was submitted to the Australian Governor-General and the Treasurer, and made public a few days later.

The commission found 19 instances of possible misconduct covering 24 different civil or criminal offences across 22 entities.

It is also estimated that the scandal surrounding the charging of fees for no provided service will lead to at least A$850mn ($606mn) in compensation.

Those large Australian banks which are on the radar of insurers include National Australia Bank, Commonwealth Bank of Australia and ANZ.

While the specific exposures from these banks are not known at this stage, sources said large banking groups tend to buy FI limit in the hundreds of millions.

For an investigation of this scale, many underwriters are expecting that the market will take full-limit losses for some accounts when all is said and done, although it was stressed that it was very early days to properly assess the claims impact.

FI policy wordings are already starting to tighten in anticipation of the fallout from the findings. Underwriters said Royal Commission-specific exclusions were already being written into polices to prevent loss contagion into future underwriting years and ultimately contain the exposure.

Insurance for financial institutions is usually sold as a bundle, comprising bankers’ blanket bond insurance, crime, directors’ and officers’ (D&O), and sometimes professional indemnity (PI) and errors and omissions (E&O).

Market sources suggested the worst claims impact would seep into the FI market via D&O exposure, however PI and E&O could also be affected.

A number of underwriters drew parallels between the Australian Royal Commission and the wider financial crisis in terms of impact on the FI market, particularly on FI D&O.

The Australian financial services market had come away relatively unscathed in 2008 and 2009, and there is a sense among underwriters that the Royal Commission will now bring Australian financial services market into line with other jurisdictions in terms of regulation and conduct.

As such, the rating impact is expected to be largely contained to the Australian market.

As a result of the Royal Commission findings, there has been a call for stricter monitoring by regulators, which will now likely be highly scrutinised for their management of financial services misconduct.

A new oversight body will be established for the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.

Commissioner Hayne said of the report’s findings: “Very often, the conduct has broken the law. And if it has not broken the law, the conduct has fallen short of the kind of behaviour the community not only expects of financial services entities but is also entitled to expect of them.”

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