After years of extreme premium increases, the directors and officers (D&O) insurance space is finally stabilising. According to Honan Insurance Group’s quarterly market update, the global D&O premium pool is now more than $1 billion.
“Insurers have been applying remediation to their portfolio, so increasing premiums and increasing deductibles to counter for the losses that they’ve experienced, particularly relating to securities class actions,” said Henry Clark (pictured), Honan’s head of professional and executive risks.
In 2016, said Clark, the overall premium pool was as low as $250 million.
In 2018, Insurance Business reported that D&O premiums skyrocketed 300% in six months, thanks to a sharp increase in the number of class actions launched against Australian companies.
“Now, after that remediation has taken place over the course of the last six or so years, the premium pool in the market is around $1.1 billion,” said Clark.
The Honan head said, while rates did increase, the increase was less severe than previous quarters and the D&O market is moving towards a more sustainable position.
According to the Honan report, new capacity is entering the market and existing players have increased their appetite for a wider range of risks.
“So what that’s resulted in is much more consistent renewals and much lower premium increases than the experience in prior years,” said Clark.
In the last decade, an increasing number of securities class actions ratchetted up the pressure on the D&O insurance space.
“2017 and 2018 were probably two of the peak years in terms of the volume of securities class actions in Australia. In both of those years there were 24 class actions,” said Clark.
2019 was almost as bad, he said, with 19 class actions.
“So that was three of the worst years in a row,” said Clark.
The Honan boss said the average securities class action costs around $48 million, even though the majority are settled out of court.
“So they [insurers] essentially had to increase their premiums three or fourfold for them to have a sustainable position,” he said.
Then COVID-19 hit, and the government made important changes to the continuous disclosure laws in 2020 that make class actions more difficult.
“Josh Frydenberg, the federal treasurer, implemented changes to the continuous disclosure laws and a lot of clients stopped providing guidance during that period, just given the uncertainties with COVID,” said Clark.
2021, he said, marked the second year when the volume of securities class actions fell.
“What we’ve certainly seen again is consecutive years of lower volumes of securities class actions. I think there were only six in 2021 and nine in 2020,” he explained.
However, Andrew McKenzie, head of financial lines, northern region, for BMS Group was still very concerned about class actions in Australia’s D&O space last year.
When McKenzie spoke to Insurance Business in October, he said Australia was the second most litigious corporate and professional environment in the world after the United States.
He talked about “a whole industry of lawyers and plaintiff law firms and litigation funders who make a living out of suing people and boards and companies.”
Clark said, now, there are a mixture of factors coming into play in the D&O space, including fewer class actions and insurers moving to more sustainable positions.
“If the securities class actions continue to slow down, then hopefully that will entice new markets to start deploying capacity for ASX listed companies which will trigger a softening of the market,” he said.
However, Clark said, it’s too early to judge if the continuous disclosure laws are having an impact.
“We need to see consecutive years of a slowing down of class actions,” he explained. “Also with the changes to the legislation requiring a higher threshold to be able to bring a class action we hope that will then encourage defendants, like ASX companies, to defend matters.”
Until now, Clark only knows of one class action in the D&O insurance space that actually reached court for a judgement. That case was dismissed.
“So what we’re hoping for with some of the changes to the legislation is that it will encourage companies to defend versus settle,” he said.
If that becomes a trend, said Clark, then it could further contribute to a slowing down of the losses experienced by D&O insurers.
