“We’ve got three risks on my desk right now that are looking for excess layer cover that, at the moment, as it currently stands, we just can’t find. So what do we do?” said Melbourne based Shane Brady (pictured), director of McLardy McShane South East. Brady said finding an Unauthorised Foreign Insurer (UFI) could be the only option.
The McLardy McShane director said, right now, there are numerous challenges for brokers.
“I think the market’s hardening, we’ve got an avalanche of regulation and legislation changes as you know. The floods - that’s been a bit of a disaster. So there are lots of things on the boil,” he said.
Despite positive indications in yearly results from big industry stakeholders like Lloyd’s and Steadfast, Brady said the more challenging areas of the insurance market could be getting worse.
Read more: Is the D&O insurance crisis finally over?
“At the moment we’re in a funny part of the cycle. The market, for the most part, for a lot of the hard to play sort of stuff or for complex risks, capacity and appetite among insurers is really hardening,” he said.
The professional indemnity (PI) insurance space, he said, is still one of those areas that is particularly tough.
“So specifically professional indemnity cover, cyber cover, public and products liability. These types of lines where it’s not your straightforward vanilla type risk, insurers’ appetites are really restrictive,” said Brady.
He said two or three years ago there was rarely a need to find excess layers of coverage and extra capacity.
“But at the moment every second risk that comes across the desk needs excess layers here and extra capacity there. It’s a lot harder broking at the moment than it was two years ago,” he said.
Brady said Lloyd’s underwriters, for example, are still going through what he said was “a corrective phase” and trying to reduce a lot of their exposures and cumulative risks.
“So trying to find a professional indemnity limit of more than a million dollars, for example, is pretty hard to find with particular types of industries like structural engineers and design and construct contractors,” he said.
Brady described the general PI insurance space as “quite a hard market at the moment.”
“I’m sure there’ll be plenty of other brokers that will agree,” he added.
The main driver behind these difficulties includes the ongoing high number of cases of litigation, especially in the D&O (directors and officers) space.
“It is certainly a contributing factor. So in Australia, D&O, especially for the top 500 companies, they’ve had a mountain of litigation that’s just cost the insurers heaps and heaps over the last few years. So that would certainly be putting pressure on the premiums,” he said.
However, Brady said the main issue is insurers are not making money and they’re getting hit with more and more claims.
“What I probably think is the main driver behind a lot of the pressure on the financial lines sectors is the return on investment from the insurers that are putting away money to try and make money off the premiums - it’s not making any returns,” he said.
Brady said the ROI (return on investment) and attempts to grow the “war chest” are not succeeding like two or three years ago.
“With interest rates rock bottom there’s just not many ways to make quick money like there used to be. So I think that’s probably another factor as well,” he said.
“It is tough out there at the moment,” he added.
So what can a broker do for a client when the market is so tough that insurers will only offer coverage if excess layer cover can be found?
“Well, that’s the golden question, really,” said Brady.
One possibility, he said, is to explore the UFI option.
“Once we’ve exhausted all the different options we’re going to head down the UFI road,” he said.
Brady explained that, unlike mainstream insurers and Lloyd’s syndicates who are approved and regulated by APRA (Australian Prudential Regulation Authority), UFIs are not.
“It’s where you can’t find cover from a local market,” he said. “So it’s a bit of a last resort. But that is sort of the last ditched step to try and find some way to fill these gaps. That’s the path we’re going to end up needing to go down. I’d prefer not to, but the local market just isn’t producing what we need,” he said.
Brady said if they decide to help a client by pursuing a UFI, the compliance obligations are quite heavy.
“We need to go through all the hoops to prove that we couldn’t find that cover in the local market at a competitive price,” he said.
However, he said, plenty of brokers in far north Queensland use UFI options for their clients frequently, especially for disaster risks like cyclones.
“So although we dabble in the whole UFI situation there would be brokers in far north Queensland that do it on almost every risk,” he said.
Brady said that the affordability of insurance in the strata market has brought the use of UFIs to the fore.
“Even the whole Royal Commission into the affordability of strata insurance up there, it recently uncovered that insurers are in business to make money and understandably when they’re exposed so severely and so frequently with things like cyclones, they just don’t want to put their money where their mouth is on those types of risks,” he said.
The result, Brady said, is brokers are “forced to shop overseas” for cover.
“Which is probably what brought on that Royal Commission originally,” he added.
