January 2024 Market Update – Professional Indemnity
The establishment of new underwriting agencies locally and appetite from London markets has continued to increase market capacity in Australia. The increasing competition has maintained a stabilisation of rates into the first two quarters of the 2024 financial year.
Appetite for construction and development risks remains constrained. Financial services professionals are also still seen as higher risk and more exposed to losses.
Capacity in this area is heavily dependent on the size of the business, the nature of work being performed, asset types and risk maturity. There remains ‘hard to place’ consultants including building certifiers, geotechnical and structural engineers and high rise residential building contractors, all of whom, unfortunately continue to have limited market competition, restrictive coverage, high premium ratings and excess structures.
There is ample capacity for town planners, urban design and internal fitout and refurbishment contractors. Design and construct (D&C) professional indemnity capacity is increasing for SMEs as insurers compete to underwrite low-risk projects undertaken by smaller contractors. The same cannot yet be said for larger contractors, however, with local markets particularly hesitant to underwrite the primary layers for these larger projects. Terms will continue to be stringent for these businesses and premiums will remain expensive. London markets are cautious when quoting Australian D&C risks, especially those operating in NSW that are subject to obligations under the Design Building and Practitioners Act 2020 (NSW).
Insurers are paying close attention to contract risk management, especially when quoting new business.
Some of the key issues at present include:
- The building and construction industry is the leading contributor to insolvencies. Large building companies that have signed fixed price contracts cannot afford to fulfil contracts without losing money due to increased costs.
- Government intervention is expected to increase demand for building work over the next 12-18 months. In October 2023 dwelling approvals rose 7.5% compared to the month prior.
- In NSW, a proposed practice standard for engineers in NSW to ensure that designs for professional engineering work are “fit for purpose”.
- The Building Legislation Amendment Bill 2023 (NSW) (the Bill) seeks to build upon current homeowner protections by holding builders more accountable for unsafe building products and introducing further regulations to address non-compliant work and ‘poor behaviour’ by practitioners.
- Prohibition on the use of engineered stone. Insurers will likely expand the breadth of exclusion clauses encompassing non-compliant building products.
Principals and contractors should adopt the following methods to attract insurer interest:
- Stringent client onboarding procedures.
- Contractual risk management.
- Peer review methodologies.
- Where there are claims, learnings from claims and outcomes to minimise risk of same occurring again.
Wholesale investment managers are continuing to obtain rate relief. Increased capacity from London has fuelled competition locally with some insureds obtaining discounts of up to 20 per cent. Insurer interest depends on the extent to which there are new funds, capital raises, returns to investors and success of the investment strategy. Funds with exposure to retail investors still have problems accessing capacity.
Funds with investments in agricultural assets, sustainable investments, carbon, mortgage, residential property, or development assets have very limited appetite. Funds invested in CBD office assets are being closely monitored noting the normalising of working from home and subsequent reduction in rental values affecting office holdings.
Investments into direct property, equities and private equity/venture capital are favoured on the proviso proposers can illustrate appropriate risk management and due diligence processes.
Depending on the nature of underlying assets or classification of investors, some investment managers may be uninsurable. For example, digital assets such as cryptocurrency are typically outside of insurer appetite. Furthermore, artificial intelligence applications are being monitored to assess claims exposure going forward, which may influence premiums. Insurers are applying broader digital asset and cryptocurrency exclusions. The Federal Government proposed an introduction of a regulatory framework for entities providing access to digital assets. Submissions closed on 1 December 2023 – will 2024 be the year we see formal regulatory action and legislation?
Licensees for hire are still subject to very limited capacity from the market, particularly where their corporate authorised representatives have varying types of underlying assets or have retail authorisations. Licensees must illustrate (with supporting information/evidence) strict protocols in place as regards oversight of Corporate Authorised Representatives (CARs) as a prerequisite when considering offering terms.
Appetite for financial planners continued to remain limited (being financial advisers and their corporate authorised representatives) – the sector is subject to the greatest number of complaints within the jurisdiction of the Australian Financial Complaints Authority (AFCA).
On 21 November 2023 ASIC announced its enforcement priorities for 2024:
- Poor distribution of financial products.
- Misleading conduct in relation to sustainable financing (including greenwashing).
- Insurance claims handling.
- Compliance with the reportable situation regime.
Insurers’ capacity for solicitors’ top-up professional indemnity varies significantly depending on insurers’ attachment point. There is ample capacity attaching at $10M but rates remain high for those attaching above the statutory limits.
Advice on mergers & acquisitions and real property transactions continues to present insurers with problems.
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