REGULATORY ACTIVITY, CLASS ACTIONS AND A CHALLENGED ECONOMY:

ALERTS FOR COMPANY DIRECTORS

Volatile share market conditions can raise red flags in an already challenged directors and officers’ insurance market. Insurer appetite for risk and the reliance each insurer places on different risk factors continues to evolve, resulting in enormous variation in the cost and availability of insurance from competing insurers. This will be a point of focus over the next 12 months.

KEY TRENDS

  • Underwriters are focusing on corporate financial stability, operations and performance with a sharp eye out for any potential shocks.
  • The intensified scrutiny is largely the result of parallel regulatory and class action activity.
  • It is the cover included for the corporate entity against securities class actions under D&O policies that is assessed as the heaviest risk.
  • The slowing growth of the Australian economy will also likely give rise to more D&O claims.
  • It is critical for directors and boards to ensure they have sound governance structures and reporting processes in place to best manage vulnerability.
Michael Herron board governance video

Insurers are reacting to the impact of class actions, Royal Commissions and economic decline in what was already challenging market conditions, according to Michael Herron, National Head, Professional and Financial Risks.

In the last half of this year we are seeing underwriters focus on corporate financial stability, operations and performance, with a sharp eye out for any potential shocks. Risks impacting an industry as a whole, such as aluminium composite panel (ACP) cladding or Royal Commission scrutiny, may be subject to exclusions or restricted terms. This intensified scrutiny is largely the result of parallel regulatory and class action activity in Australia.


Corporate culture and accountability is exposing individual directors, but it is the cover included for the corporate entity against securities class actions under D&O policies that is attracting the heaviest risk. The Institute of Company Directors (ICD) reports that class actions account for 90% of D&O claims concerning Australian Stock Exchange (ASX) listed companies. There has been much conversation around the growth of class actions in Australia over the past few years, with the 2017–2019 period recording a watershed spike. As of 4 September 2019, there were 107 current class actions in the Federal Court, 16 of which were securities class actions filed this year.


As of 4 September 2019, 107 current class actions in the Federal Court

16 of which were securities class actions filed this year

Australia has become an increasingly competitive market for litigation funders – a trend that is likely to persist following recent decisions of the Federal Court and New South Wales Court of Appeal with regard to common fund orders and as the fallout from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continues.


The slowing growth of the Australian economy will also likely give rise to more D&O claims. In a statement released in August 2019 the Reserve Bank of Australia reported that gross domestic product (GDP) growth ‘troughed’ in the middle of the year while the unemployment rate rose and credit growth slowed. Insurers look for a correlation between economic decline and a spike in D&O claims.

Any period of change in a company – positive or otherwise – can give rise to D&O exposures, so it’s critical for directors and boards to ensure they have sound governance structures and reporting processes in place to best manage vulnerability. Every director needs to have a solid understanding of their disclosure obligations and shareholder expectations to best mitigate the risk of D&O exposure, and present the best possible picture to their shareholders, insurers and regulators.


If you’re a company director or board member, now is the time to work closely with your insurance broker to understand your risk exposures. Gallagher connects clients with risk management tools and solutions to help develop bespoke risk management programs, while seeking the best available cover.

Michael Herron headshot

Michael Herron

National Head,

Professional & Financial Risks

T: (02) 9242 2064

M: 0466 391 061

E: michael.herron@ajg.com.au

John Muir headshot

John Muir

WA Manager,

Professional & Financial Risks

T: (08) 6250 8452

M: 0466 867 006

E: john.muir@ajg.com.au

Sources:

‘AIG bails on Australian aviation business’, Insurance News, 5 June 2017

‘Swiss Re considers aviation insurance withdrawal’, AOPA Australia, 2 September 2019

Australian dollar hits 10-year low with further downside risk forecast, Small Caps, 27 August 2019