Continuous disclosure reforms have now become official following the Royal Assent given to the Treasury Laws Amendment (2021 Measures No. 1) Bill 2021 on August 13. Under the Act, civil penalty proceedings commenced under the continuous disclosure and misleading and deceptive conduct provisions must prove that an entity or officer acted with knowledge, recklessness, or negligence in respect of an alleged contravention.
With the new legislation, is the environment in Australia now poised to be less litigious, and what effect will this have on the directors’ and officers’ (D&O) insurance space? Insurance Business spoke with Ryan Neary (pictured), professional and financial lines head at GSA Insurance Brokers, to find out.
“I think it’ll be less litigious,” said Neary. “Whether litigation funders and plaintiff’s lawyers will find other ways to bring claims or bring actions, this remains to be seen.”
He elaborated: “The avenues through which security class actions have been brought revolve around alleged non-disclosure and guidance to the market; this will be made a lot harder now with the removal of strict liability. There now needs to be an onus on negligence, recklessness, or fraud.
“So, I think it’s going to make it a lot harder to bring frivolous actions, or actions without some form of substance. In terms of the insurance market and where it sits for D&O, yes, it’s a positive moving forward. However, insurers still have the losses that they are paying and will continue to pay from the past class actions that have already been notified and already been defended.”
What that means is any potential softening in the market won’t be happening soon. In Neary’s view, what is likely to take place is more of a stabilisation, part of which can be attributed to the significant increases within the D&O liability premium pool over the past couple of years.
“I think the insurers have now got to a rate where it feels sustainable for them,” the GSA executive told Insurance Business. “So, everything being equal, they don’t feel that they need to apply another significant increase at the moment. I think you’ll see rates stabilise out and you’ll see the introduction of new capacity, from both local providers and in London. And that will be measured capacity, but it will still be new capacity, which will create some competition.
“We have seen a lot of listed companies being more cautious around their D&O programmes and looking at different structures. We have already seen a trend in companies removing entity coverage (Side C) as an option. Not every organisation is deciding to do that. But there are some that are deciding to do that due to the level of costs and the fact that they can’t build a tower or have access to capacity to sustain that option of coverage within the policy.”
Neary believes the market may start to soften in 18-24 months’ time, but not without having stabilised first. He said that while the market is indeed shifting, it is by no means a quantum shift.
“It’s only positives at the moment,” added the professional and financial lines head. “But I don’t want people to be overambitious about these changes to disclosure laws or changes to the market.
“There have been significant increases in premium; there have been significant claims. And these claims are severity claims, so they are significant in terms of their levels of loss. So, it will take the market a while and a period to come back to a stage of softening.”
According to Neary, what’s important is that the addition of new capacity and the changing of the laws will make stabilisation possible. “Because if it kept going the other way,” he said, “you would have had insurers pulling out of the market completely. So, it is a positive but don’t get overexcited. Let’s keep grounded and measured. You can’t say it’s not a positive – of course it is – but it’s not going to change the market overnight.”
