January 2023 Market Update – Professional Indemnity
As anticipated in our last market update, we have experienced a return of London market capacity to Australia. This has meant increased competition which we believe will lead to the stabilisation of rates in the first half of the 2023 calendar year.
Appetite remains limited for contractors, construction and financial services professionals. We expect, however, that reinsurance negotiations for 31 December 2022 will “widen” insurer appetite even across these Industries and professions.
We have also experienced insurers offering higher limits of Indemnity and becoming more negotiable on coverage. Across the portfolio, the softening we have experienced is mostly ascribed to those presenting ‘consistent less volatile risk’ (minimal changes to fee income, their clients’ profile, present strong risk management, have no claims and are less exposed to claims trending). We have categorised those in this cluster falling across the following professions: accounting, advertising, marketing companies, training and education providers, information technology consultants and medical service providers.
Financial Services
There are limited insurers offering professional indemnity for financial planners (being financial advisers and their corporate authorised representatives) and wholesale fund and investment managers. Depending on the nature of underlying assets or classification of investors, some investment managers be uninsurable.
- Financial Services Compensation Scheme of Last Resort legislative bill was open for consultation until 7 October 2022. Legislation has been introduced to establish an accountability regime for the banking, insurance and superannuation industries (the Financial Accountability Regime).
- ‘Better Advice’ reforms came into effect on 1 January 2022 to include an expansion to the role of the Financial Services and Credit Panel within ASIC to operate as a single disciplinary body for financial advisers, the introduction of new penalties and sanctions for financial advisers who have breached their obligations under the Corporations Act, and a new registration system.
- Renewed focus on data and cyber security for Financial Services Licensees:
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- RI Advice case – RI Advice concerned a case brought by ASIC in the Federal Court of Australia against RI Advice Group Pty Ltd (RI Advice), a FSL holder alleged it failed to fulfill its obligations under the Corporations Act (to maintain adequate risk management systems) following nine reported incidents of cyber breaches between June 2014 and May 2020 pertaining to its group of authorised representatives (AR Practices). This decision is the first clear indicator from Australia’s judiciary that cyber security is an obligation that Financial Services Licensees can no longer ignore. See our article here.
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- ASIC will begin publishing data about breach reports annually on its website from late 2022
- On 1 July 2022, amendments to the Privacy Act came into effect to permit reporting of financial hardship information within the credit reporting framework.
- The ALRC is scheduled to release its second interim report on its review of the Corporations and Financial Services Regulation by 30 September 2022. The report will focus on regulatory design and the hierarchy of primary law provisions, regulations and class orders.
- New government intends to wind back amendments to continuous disclosure obligations. Concern here is more so for large ASX-200 organisations.
- Cryptocurrency and digital asset regulation – The Digital Assets (Market Regulation) Bill 2022 was open for consultation until 31 October 2022. The Bill introduces licences for digital asset exchanges, digital asset custody services and stablecoin issuers and is to provide confidence to consumers that digital asset risk is subject to same level of stringency and oversight as other financial services including regulatory guidance and certainty. Coincidentally, the White House released its first ever framework for Responsible Development of Digital Assets on 16 September 2022. It appears locally that the Regulator is very uncertain in its position with regard to Digital Assets as evidence by its recent conduct. See our article here.
- Financial advisers - the fall out following AIG’s withdrawal continues. There is some emerging appetite for self-licensed firms. Increases with those whose holding insurers propose renewal is about 15 per cent, albeit those requiring a new carrier can expect up to 50% uplifts. Those advising on structured products, unregistered schemes, development funding investments and digital assets will struggle with alternative quote options.
- Investment and fund managers - overseas regulated (via Lloyd’s of London) and unregulated capacity continues to come into the Australian insurance market. There is a wider appetite for the class, and we have seen particularly for wholesale equities funds some competition yielding premium savings.
Funds that comprise majority retail investors have limited options for alternative quotes . Where underlying investments include agricultural, carbon, mortgage, residential property, or any development assets, there is very limited appetite.
Schemes comprising sophisticated wholesale investors into direct property, equities and private equity investments are favoured. As foreshadowed in our last update there is now appetite for crypto funds and digital assets but these remain challenging placements and cover is costly.
Licensees for hire remain difficult to place, particularly where their corporate authorised representatives have varying types of underlying assets or have retail authorisations. Insurers are insisting licensees have strict protocols in place as regards oversight of Corporate Authorised Representatives (CARs) as a prerequisite when considering offering terms.
We are starting to see as low as 10% uplifts on established funds, but this will depend on the extent to which it has new funds, capital raises and maintains consistent investment strategy and returns to investors.
Construction professionals, principal contractors and owners
There is a lack of appetite across this class. Whilst presently there are a multitude of issues across the construction industry Bellrock has developed proactive risk management strategies and focused on policyholder education to mitigate against the trends.
The articles that we have recently published on construction and engineering and issues faced by the industry include:
- In NSW, professionals captured by the Design and Building Practitioners Act 2020 (NSW). Future claims will include allegations of failure to comply with provisions of the Act as practitioners continue to adapt to obligations.
- Inflation increasing cost of materials/delays due to Russia tensions imposing pressure on smaller builders without ability to bulk purchase.
- Large building companies that have signed fixed price contracts now cannot afford to fulfil contracts without losing money due to increased costs.
- The state regulators who provide consumer protection in the form of home warranty insurance for residential building works are likely to undertake more stringent reviews to reduce consumer exposure to insolvency.
- Demand for building work could wane - Prospective purchasers who were considering buying a new apartment or house, are now looking to purchase existing stock to remove any risk of insolvency (and in some case mitigate against the publicised defects on new developments).
- Contractors undertaking work for major principals are being forced to ‘sign up’ to principal-drafted contracts with onerous contractual obligations. Contractors must balance value of the work vs cost of procuring appropriate insurance cover (i.e. principal’s indemnity, proportionate liability, contractual liability, pollution writebacks). There has been a trend of contractors succeeding in pushing back however this is not prevalent.
It follows that there are a raft of ongoing issues, regulation, claims and reform taking place across the industry. There will be a time lag for these to materialise, but in essence it appears that rates are sufficient, attracting competition back to the market.
Grouped within this class are building certifiers, geotechnical and structural engineers all of which, unfortunately continue to have limited market competition, restrictive coverage, high premium rating and excess structures.
Solicitors
The washup of the 2022 solicitors’ top-up season saw on average a 15 per cent uplift on primary (state schemes) and top-up collectively. As per our June 2022 market update, cyber exclusions have become consistently applied on top-up policies along with broad reaching exclusions pertaining to employment and other social/governance risk.
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