With more transparent reporting standards coming as a result of the Corporations Act, and more business being conducted in cyberspace, financial lines insurance is an increasingly important component for many clients.
Having the right financial lines insurance cover is a bit like strapping on a bulletproof vest. It can take the hits and protect the insured... and this area of insurance is becoming increasingly sought after.
As the Australian securities regulator moves towards more transparent reporting standards and more stringent compliance requirements under the Corporations Act, this creates greater obligations for directors and officers, and therefore greater potential exposure.
Alex Green, Head of Casualty at Vero, thinks the new landscape of continuous disclosure presents an ongoing and increasing liability risk.
“It’s the single most frequent allegation in a Directors’ and Officers’ class action,” he says. So what are underwriters doing to prepare for them?
“D&O Liability policies provide cover for directors and officers facing legal action as a result of alleged breaches of their disclosure obligations,” says Vero’s Green. “Underwriters need to be increasingly careful when pricing certain segments of the market, where larger shareholderclaims from a breach are most prevalent. Premiums for D&O policies need toaccurately reflect these risks,” adds Green, “particularly policies providing coverage for claims against the entity itself."
Mark Gates, the Chief Claims Officer – Financial Lines Asia Pacific at Zurich, believes the big influencer of D&O is class actions. Indeed, leading Australian litigation funding firm IMF Ltd announced in its 2010 annual financial report that cases under management had increased by $400m.
“There are approximately 30 class actions commencing in Australia this year,” claims Gates, “and everyone has their eye on the bank penalty fees action, with more to be filed against multiple banks. What’s more, actual loss ratios will continue to cause D&O underwriters sleepless nights."
Even a small claim would cost from $25-$50 thousand in defence costs.
As demonstrated by the recent Kirsty Fraser-Kirk vs David Jones punitive damages case, Employment Practices is opening up as a fresh exposure risk that directors may not have previously contemplated.
“Even a small claim would cost from $25,000 to $50,000 in defence costs,” says Gates, “leaving aside whether the insured has any exposure to the claim itself.
Bill Hassos, Regional Manager – Financial Lines for Allianz, believes increasing insolvencies, questionable corporate financial practices, increases in class actions and litigation funding, and strengthening regulatory enforcement, supervision and litigation, have led to a challenging environment.
“Early in the past decade, the expansion of D&O policies to include cover for the ‘Company’ has resulted in a significant increase in securities claims from shareholders of publicly listed companies,” states Hassos. “Such claims have swamped the D&O coverage and premium pool, which was largely priced for directors’ liabilities and interests only.”
Internal controls go part of the way to building a risk management framework, and insurance can add value to this framework.
Rapid developments in technology have also led to new types of coverage. In PI insurance, for instance, insurers provide bespoke IT Professional Indemnity policies and Public Liability policies. And in other lines, such as Crime & BBB (bankers blanket bonds), insurers have broadened coverage to cater for risks such as computer fraud, false vendors, skimmers, hackers and staff fraud, along with breach of copyright and internet liabilityon websites.
Chubb Insurance sees this sectoras an area in which insureds and clients will need to consider more, as businesses increasingly move to online platforms. Peter Kelaher, the company’s NSW Corporate Unit Manager of their Executive Protection Practice, believes companies with access to private, confidential information about their customers need to shore up their responsibility to keep it secure.
“Internal controls go part of the way to building a risk management framework, and insurance can add value to this framework,” says Kelaher. “The driver for this is a growing desire by Australian clients to transfer the risk and liability (to insurance) of a data breach or the inadvertent disclosure of sensitive customer information to a third party."
However, overall growth within financial lines is coming at a cost. "It’s a growing segment, but premiums are shrinking, the number of players is increasing, and for the past two years loss-ratios have increased and are forecast to increase in the next year,” says Zurich’s Mark Gates. “That’s a disconnect that is just not sustainable."
CYBER RISK IN FOCUS
One of the hottest categories within financial lines is cyber risk. Organisations with access to private, confidential information about their customerbase can get into serious trouble from a breach. As a result, those with a significant web presenceand a dependency on data management technology haveemerging exposures, as recently highlighted by the Vodafone databreach in January 2011.
One policy addressing enterprise-widenetwork exposure, including laptops, disk drives, backup media, mobiles and tablets, is CyberSecurity by Chubb Insurance, which was released last year.
It’s designed to protect commercial businesses of all kinds against cyber-crime expense (first party) along with cyber liability (third party), to cover exposures that arise when customer information is breached or stolen.
This product is underwritten on a client-by-client basis, as Chubb’s Peter Kelaher explains. “Once categorised by industry, the underwriter then considers the customer being held and how the client protects that data from third parties, including what systems are in place to mitigate a data breach/unauthorised disclosure should it occur. As always, the client’s loss history is relevant, and can assist with underwriting the exposures. ”First party coverage components include: Business interruption, E-Theft / E-communication / E-Threat Loss, Privacy Notification Expenses, E-Vandalism Loss, Crisis Expenses, and informant Reward Expenses.Third party liability includes coverage for: Disclosure Liability, Content / Reputational / Conduit / Impaired Access Liability, Defence Costs including Extradition, Prior Notice Exclusion,Full Severability of Exclusions, plus additional options.
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