The Australian directors and officers insurance market is distressed, and Swiss Re Corporate Solutions is seeking to assist brokers and corporate clients in this challenging area
That’s the message from litigation risk expert Jeremy Scott-Mackenzie, who warns that a massive increase in securities class actions is having a damaging effect on the D&O market.
“We have seen a continual increase in securities class actions in Australia, but even more concerning is that we have seen a spate of them in the first quarter of 2017,” explains Scott- Mackenzie, who is head of Casualty and FinPro Australia and New Zealand at Swiss Re Corporate Solutions.
“Australia would normally see six to eight of these actions a year, but we have already had four in the first quarter – Bellamy’s Australia Limited [two actions filed], Spotless Group Holdings Limited, Sirtex Medical Limited and Woolworths.”
With the Australian D&O insurance market premium worth in the vicinity of $280m, and the average securities class action costing between $50m and $70m for the insurer(s), some basic maths is all that’s needed to get an idea of the size of the problem.
“The first quarter of 2017 could cost the industry in excess of $300m, thereby draining the annual D&O premium pool in just the first quarter,” Scott-Mackenzie says.
Scott-Mackenzie is the national president of the Australian Professional Indemnity Group, a leading body that represents D&O insurers and brokers. He points out that many insurers operating in Australia are reducing their appetite in the D&O market.
“One insurer, that 10 years ago would have provided $50m limits, is now only providing $10m,” he says.
“We also see increased underwriting scrutiny and increases in market pricing.”
Managing the merry-go-round
So, with these challenges in mind, why does Swiss Re Corporate Solutions want a bigger slice of the D&O pie? Scott-Mackenzie explains that there are still opportunities in the D&O space; it’s just that the risk needs to be shared across the market.
“As with any other catastrophe insurance line, like property, we need to move to co-insurance, rather than everyone putting down $10m layers one on top of the other,” he says.
“The benefit of that is that all of the insurers’ interests are aligned.
“One of the concerns I have is that the primary insurer puts down $10m, which is going to be consumed irrespective of the conduct of the case. Therefore the primary insurer may not provide the client with effective claims management as they no longer have any financial interest.”
Scott-Mackenzie believes that a co-insurance approach aligns everyone’s interests, and so catastrophe risks become manageable, “rather than the merry-go-round that has occurred in the past 10 years of primary insurers getting burnt and exiting the D&O market, only for the newer entrants to suffer the same fate”.
“We need a change of approach by insurers, which is already happening to some degree,” he adds.
“Brokers are beginning to promote a co-insurance approach and are explaining the benefits to clients. It’s about a mindset change for all concerned.”
Testing times
There are many factors that drive litigation, and some industries have a higher exposure than others. Gaining a comprehensive understanding of how that plays out in the market is key to an insurer’s success in this area.
Swiss Re Corporate Solutions invests a lot of time in understanding clients’ risk management and how they would approach securities class actions. “We engage with clients on their preparedness for securities class actions and, where appropriate, assist them in prevention and response measures.”
A huge part of this effort involves assisting corporates in better meeting continuous disclosure regimes. “Risk managers and the C-suite are usually very receptive and appreciate of our insights,” Scott-Mackenzie says. “Part of this support is our local claims managers walking through different scenarios. Preparation can nip the claim in the bud, and avoid a multimillion-dollar securities class action.”
Scott-Mackenzie says Swiss Re Corporate Solutions aims to make clients aware of common pitfalls that lead to securities class actions. “Both good news and bad news needs to get to the top as quickly as possible and then needs to be conveyed to investors as quickly as possible,” he says. “How does the company make sure that information doesn’t get buried? What is the company’s response plan if the Australian Securities and Investments Commission makes allegations? Who are the company’s advisers when serious litigation occurs? What should the employees be told to do if there is serious litigation? Who is the company’s public spokesperson?”
Scott-Mackenzie emphasises that these response plans must be tested on a regular basis. “A response plan may be in place, but few companies have practised it,” he says. “You must ensure that your planning is robust and actually works.”
SWISS RE CORPORATE SOLUTIONS
Swiss Re Corporate Solutions offers innovative, high-quality insurance capacity to mid-sized and large multinational corporations across the globe. Their offerings range from standard risk transfer covers and multi-line programs to highly customised solutions tailored to the needs of their clients. Swiss Re Corporate Solutions serves customers from over 50 offices worldwide and is backed by the financial strength of the Swiss Re Group. For more information about Swiss Re Corporate Solutions, please visit www.swissre.com/corporatesolutions or follow them on Twitter @SwissRe_CS.
Contact
Jeremy Scott-Mackenzie
Head Casualty & FinPro Australia & New Zealand
Vice President - Corporate Solutions
Direct: +61 2 8295 9875 Mobile: +61 405 513 099
E-mail: [email protected]
