Premium increases not enough in unprofitable D&O market

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Rising premiums in the D&O market are not enough to create a sustainable market as class actions continue to impact the sector, a new report has found.

The second of a series of three white papers released by XL Catlin and law firm Wotton + Kearney has found that the rise in class action lawsuits and its impact on Side C coverage as part of D&O policies continues to make its presence felt on the insurance market.

Rising defence costs, more class action settlements and “chronic under-pricing” by insurers since at least 2011 have also impacted the sector, the paper states.

“There can be little doubt that a growing market-wide realisation of these factors has been the catalyst for the current ‘hardening’ market environment for Australian D&O insurance,” the whitepaper notes. “However, while important, premium increases alone are unlikely to result in a sustainable ABC D&O market.”

The rising number of class action lawsuits are seen as the biggest challenge facing the D&O market in Australia as insurers are being put on the hook for more costs. The XL Catlin/Wotton + Kearney report finds that the average class action settlement in Australia has hit $50 million with the average insurer contribution to settlements standing at $32 million, or $40 million when defence costs are included.

The report estimates that the current premium pool in D&O ABC insurance stands at around $210 million which will have to rise by a factor of around 3.5 times, based on 2016 levels, “in order to re-establish a profitable D&O market.”

“Of course this approach is rather simplistic and ignores the effect increased premiums will have on D&O insurance programme structures and limits, which in turn may change the future loss experience of insurers,” the report continues. “However, it does provide some guidance as to the extent of the under-pricing in the ABC segment of the Australian D&O market for the last six or more years.”

Recent market developments, as prices continue to rise and coverage limits change, show that insurers are attempting to “restore some semblance of profitability” to their D&O books after years of losses, the report states.


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