What does the Banking Royal Commission mean for corporate insurance and fund managers?
Welcome to our special feature on the corporate insurance market implications of the Hayne Royal Commission and the fallout for the funds management industry. The final report of the of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry included 76 recommendations across these industries as well as the insurance industry.
Here, we take a closer look through the lens of our special guest contributor Ryan Neary (Manager Professional Risks) from GSA Insurance Brokers as he explores market trends, what you can do to minimise the impact, and some tips for dealing with your insurer.
Impact on the market and insurer response
This string of activities and findings sparked a reaction from insurers already stung by the impact of the increase in securities class actions (Directors and Officers (D&O) securities class action claims and reported circumstances currently exceed the total insurance market premium pool by a significant margin). Insurers are now looking to take corrective action on their portfolios and limit their capacity to these exposures if possible.
One way insurers are looking to limit their exposure to potential losses arising from the Royal Commission is by applying Royal Commission exclusions under professional indemnity (PI) and D&O liability policies. Where an exclusion like this is applied, it is important to understand the implications and what it means to the coverage available moving forward. It is likely those impacted directly by the Royal Commission will have these exclusions applied. However, we are seeing a trend where insurers are looking to apply this limitation to all our clients practising in the financial services sector.
If a Royal Commission exclusion is applied to a client's PI and/or D&O policy, there is a chance the policies will provide minimal coverage for any future or past claims and, in a worst case scenario, the claim could be excluded in its entirety. Therefore, it is GSA's strong recommendation these exclusions should be avoided.
In addition to limiting exposure, insurers are also looking to correct their portfolios in several other ways, including:
- Reducing the levels of capacity insurers are deploying in the market. As a result of increased claims activity and rising loss ratios, insurers are looking to reduce the amount of limit they have out on one client.
- Increasing deductible structures. Insurers want clients to have "skin in the game". Therefore, in the event of a claim, the first amount payable by a client needs to be higher. For listed clients with securities entity exposure we have seen increases in excess of up to 300 percent.
- Increasing premium rates. Insurers are increasing their underwriting rates on clients in the financial services sector. The minimum increase we are seeing for private clients is approximately 15 percent and for listed clients the average premium increase is approximately 50 percent, although we have seen increases of up to 200 percent.
- Increasing attachment points from insurers on towers of coverage predominantly on D&O. Insurers are not willing to deploy new capacity unless they are attaching at a point in excess of the primary $50 million when coverage for the entity is included.
Due to the impacts of the ever-growing shareholder class action environment, together with the implications of the Royal Commission, the state of Australia's financial and professional lines market remain in a state of flux. We are currently in a hardening market and GSA predicts this will be the case for several years to come.
In London, Lloyds has undertaken a strategic review of all syndicates with a view to shutting down under-performing syndicates and reducing the amount of capacity being deployed to poor performing classes of insurance, including PI.
Syndicates that have been unprofitable for the past three years will need to submit a business plan demonstrating how they will correct this and return to profit. As a result, eight syndicates have been shut down and a number of others, in line with their business plans, forced to tighten their appetite and reduce lines of capacity.
This has put further pressure on Australian clients as Lloyds were a big provider of security for PI and D&O in the financial services sector.
What can you do to minimise the impact?
Whilst the market is in a state of flux and insurers are looking to claw back premiums, a good outcome can be achieved, and coverage secured, if the process is handled correctly and lines of communication are kept open between all parties.
The key to achieving the optimum outcome on an insurance renewal is to start the process early and provide an extremely detailed underwriting submission. We recommend starting the process four months out from renewal, and whilst there are proposal forms and standard documents insurers require in order to provide quotations, we recommend going that one step further.
One of the main concerns of insurers is the lessons learned from the Royal Commission, for example, systemic items such as "fee for no service". We advise our clients to demonstrate to insurers that an internal review, audit and analysis has been performed on the business/portfolio to ensure none of the issues identified in the Royal Commission are present in the business and, if they are present, what corrective action has been taken to help mitigate any future issues that may arise.
In addition to a detailed submission, we recommend meeting with the insurer. In a challenging market this is an important step – it allows the insurer to gain comfort with a client and build trust through asking questions and gathering information which may not be available in the written submission. If the insurer is forced to make an assumption in their risk analysis, they will assume the worst, so this interaction allows assumptions to be removed which will only benefit the client.
Whilst we recommend building a relationship with your current insurer, in this market there may be some benefit in undertaking a marketing exercise and engaging with other insurers. This allows you to benchmark your current insurer across items such as capacity, deductible, coverage and premium. We have seen clients secure significant savings in premium and an increased scope of coverage through engaging alternate insurers. We would not recommend this be done every year, as you need to protect your brand within the contracting PI and D&O market.
How can GSA help?
With the market in a state of flux, you should expect some turbulence when renewing your professional liability insurance program. It is no longer a buyer's market nor a given that insurers will be able to offer the same coverage, limit or premium, as seen in previous years.
This is the time when the benefits of using an experienced broker will be felt the most. GSA is an independent broker, with a focus on providing insurance solutions for clients in the financial services sector. GSA holds strong relationships both locally and in London with all insurers deploying capacity and is in a strong position to achieve the best results in this challenging and volatile market.