Insurers hike premiums for business as class action costs skyrocket amid bank inquiry

Firms are facing prohibitive premiums as insurers react to soaring class actions costs spurred by the banking royal commission.

Royal commissioner Kenneth Hayne. Picture: Eddie Jim

Companies are facing a crisis in insurance against bad behaviour sparked by soaring class action costs, as insurers price premiums out of reach and seek to exclude some types of cover at a time when risks including the banking royal commission are rising sharply.

Prices for directors and officers insurance will rise even further as a result of the banking royal commission, matching an expected rise in the number and cost of claims, analysts at Investment Bank JPMorgan and actuarial consultants Taylor Fry said.

The crisis had been sparked by soaring costs for claims and increased frequency, with AMP facing competing claims from five firms over the collapse in its share price caused by revelations at the royal commission about its practice of charging fees for no service.

Taylor Fry analyst Kevin Gomes said there were “worrying signs” in directors and officers (D&O) insurance and he expected a number of providers to withdraw from the market.

“The royal commission has led and will continue to lead to class actions because it has highlighted poor practices by companies,” Mr Gomes said.

“I mean AMP is a good example — there are a number of class actions that have come from that and there will be more to come.”

Mr Gomes said insurers were enforcing “very large” premium increases and in some cases pricing them beyond the reach of customers to avoid claims risk. But they were also increasing the excess on claims to be paid by the customer and seeming to exclude coverage for class actions.

A report by JPMorgan and Taylor Fry today forecast that premiums for professional indemnity cover — which includes directors and officers insurance — would jump by 11 per cent this year, following an 11 per cent rise last year.

“The cost of class actions in the directors and officers class, particularly relating to breaches around disclosure obligations for listed companies, is approaching crisis levels,” Mr Gomes said.

“This could create serious implications for a functioning economy if a significant increase in premiums creates difficulty for companies to obtain cover at an acceptable level.”

Commissioner Kenneth Hayne will hand his final report to the Federal Government on Friday and its release on Monday is expected to be closely watched by lawyers and companies for findings and recommendations that could spark fresh claims against a sector that accounts for one third of the Australian stock market’s capitalisation.