Insurance premiums for directors and officers have skyrocketed a massive 300% in the last six months, thanks to a sharp increase in the number of class actions launched against Australian companies.
Only last week, ASX-listed QBE
agreed to pay $132.5m to settle a shareholder class action led by Maurice Blackburn over a 2013 profit downgrade. And in the last five years, class actions have increased threefold, with most cases often due to alleged failures to meet continuous disclosure obligations, industry experts said.
Susie Amos, principal at actuarial firm Finity, said some sectors are hit especially hard by premium spikes in D&O policies due to the increased liabilities insurers face for share-related claims against businesses and their directors, The Australian Financial Review
"Some risks have increased threefold,” Amos told AFR
. “If it's a large listed company in mining, or a financial area or in manufacturing, then I've heard of 300% increases happening a few times. But even 'good' risks are increasing by 20%. Fundamentally, it's because the insurers are making big losses, that's the main reason it's crystallised in the last six months."
Scott Curley, a director at GSA
Insurance Brokers, said the D&O policies of “well-run” financial services firms, fund managers, and banks had been hit with 40% increases since March; while “obscure” businesses, such as Chinese companies listing on the ASX, are now paying up to 300% more for their cover.
Curley told AFR
that the Side C coverage of D&O policies – which protects the company and its D&O from claims made against them – is where premiums had risen the most, adding that "banks' [policies] are definitely getting more expensive.”
According to industry experts, bigger banks usually take out D&O policies with a $500m ceiling cover, and generally pay up to $5,000 per $1m of cover, or $2.5m a year, for insurance with a Side C component. AFR
said this means that even a 30% increase on cover within a $500m policy would translate to a $750,000 spike on the insurance premium for a big institution.
Finity's Amos said some companies opted not to take out Side C cover because of the view that they may be targetted if they have insurance cover.
With a raft of class actions dragging down insurer profits, Curley said insurers will often not allow clients to disclose if they have D&O cover and are driving tougher policy arrangements.
"[For policies] above a $20m cover limit, you used to be able to work with insurers to get a relatively reduced price,” he told AFR
. “For the next $30m above the $20m, it may come in at half the price of the first $20m. But what insurers are saying now is 'we don't feel safe unless we're above $50m'. They still feel that the first $50m is vulnerable to a class action, where previously they thought if they were sitting above $20m they were going to be pretty safe. With all the litigation going on, a company with a $50m limit is pretty fair game."
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