Aon sees ‘green shoots’ on horizon for troubled directors and officers insurance

Price increases of almost 60pc for directors and officers insurance premiums have seen businesses scale back coverage by almost a third.

Aon reports Australian premiums on directors and officers insurance now stand near $840m a year, up almost 60 per cent on where they were in 2019. Picture: NCA NewsWire/Flavio Brancaleone

Price increases of almost 60 per cent for directors and officers insurance premiums have seen businesses scale back coverage by almost a third, a check-up on the industry reveals.

An update from professional services and risk management provider Aon finds directors and officers insurance remains a deeply troubled product line, but hopeful signs are on the horizon.

Aon brokers deals between many of Australia’s largest companies who buy directors and officers insurance to cover costs arising from class actions relating to market disclosure.

“Insurers are continuing to place upward pressure on premiums, pointing to years of underpricing, and the need to secure pre-established minimum rates per million dollars of capacity,” the Aon report said.

The report found coverage was easier and cheaper for “private company risks, particularly where those risks are less likely to be impacted by COVID-19”.

“For less robust organisations, or those organisations in more challenged sectors, insolvency exclusions have become more prevalent,” the report said.

Insurers continue to point the finger at securities class action activity as a key driver for premium and capacity realignment, noting further deterioration in prior years claims reserves and ongoing new securities class action notifications.

Aon’s update finds potential changes to market disclosure rules are likely to neuter much of the damage wrought by huge claims in recent years.

The amendment to Australia’s continuous disclosures rules would result in disclosing entities and directors and officers only being liable in civil proceedings if they act with “knowledge, recklessness or negligence” in failing to update the market.

Aon finds the market, which has been grappling with the loss of several major providers in recent years, seeing “green shoots” in the form of new competition.

Aon financial services group director Eden Fletcher said new business out of Lloyds in London being offered into the Australian market was likely to take the heat out of further high premium price increases.

“While we expect that cap­acity to be cautiously deployed, it’s our view that additional cap­acity will temper more opportunity in pricing behaviours that fall outside of market trend,” he said.

Aon reports Australian premiums on directors and officers insurance now stand near $840m a year, up almost 60 per cent on where they were in 2019.

But Mr Fletcher said recent price rises were taking prices from a low base and “places the insurance market in a more sustainable position”.

Limits of liability on purchased coverage declined almost 30 per cent last year to more than $50m on average.

Mr Fletcher said the shift down was a rationalising and convergence of coverage as businesses scaled back policies to typical class action claims of stablemate businesses.

“We’ve been in a D&O insurance environment where the cost of capacity has been reasonably cheap which has probably led to organisations purchasing what have historically been large policy limits,” he said.