Company risk protection insurance soars, some covers excluded

Companies seeking insurance against bad behaviour face a crisis as premiums soar and insurers exclude some types of cover.

Kenneth Hayne will hand his final report to the federal government tomorrow. Picture: David Geraghty

Companies seeking insurance against bad behaviour face a crisis 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 royal commission, matching an expected rise in the number and cost of claims, analysts at investment bank JPMorgan and actuarial consultants Taylor Fry say.

The crisis had been sparked by soaring costs and increased frequency of claims for class actions, 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.

“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 the risk of suffering a claim.

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 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 tomorrow 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 stockmarket’s capitalisation.

The JPMorgan and Taylor Fry report found the insurance industry was also exposed to risks from the final Hayne report, including the potential loss of commissions, increased regulatory costs and the need to redesign products to better suit customer interests.

“I think Hayne and the regulator — in particular ASIC — are pushing for a different view to caveat emptor,” JPMorgan analyst Siddharth Parameswaran said.

“His view is that customers don’t really understand what they are buying.”

There have also been expectations that Commissioner Hayne will recommend the abolition of commissions across the financial services industry, posing major challenges for financial planners, mortgage brokers and others.

While most retail insurance products are sold directly, banning commissions could have a major effect on the broking industry that services small and large business customers and collects commissions of up to 30 per cent of the premium.

“That may be harder to do going forward because all of a sudden if your commission rate is 30 per cent, the customer is going to ask ‘well why am I paying 30 per cent when all you are doing is sending a renewal notice’,” Mr Parameswaran said.