A major D&O insurance broker has warned of a potential shortage of qualified directors in Australian companies due to a class action-driven spike in D&O insurance costs.
Marsh said decreased availability of D&O insurance plus skyrocketing insurance fees could leave Australian companies unable to attract and retain experienced board directors and senior executives.
In its submission to the Australian Law Reform Commission’s inquiry into class-action proceedings and third-party litigation funders, the insurance broking and risk-management solutions leader said its seven years-worth of data suggests a direct link between rising D&O insurance fees, and the exit of several major insurers from the D&O market, to the rising number and size of class action activity since 2011.
“Qualified directors and officers require companies to buy insurance to protect them against the ever-increasing scope of personal liability to serve on boards or take on senior management roles,” said Craig Claughton, head of the financial and professional practice at Marsh Australia. “If the market for D&O insurance becomes restricted or too expensive, corporate Australia could lose the depth of experience needed to function in response to regulatory and shareholder demands.”
Marsh data showed that, between 2011 and 2018, there has been a 250% plus spike in the cost of D&O insurance for ASX200 companies, most of which has occurred in the past two years. Companies are also retaining more risk, with ASX200 companies typically increasing the amount four-fold to more than $10 million per loss.
Marsh also noted that many insurers have withdrawn from the D&O market since 2011 as research has shown that they have forked out more than $1 billion to securities class action settlements in that time.
“Rising premiums would normally attract more insurers to enter a market,” Claughton said. “However, insurers are now so concerned about the potential size and scope of class action lawsuits that many are either cutting back their offering or no longer write the coverage at all. The D&O market is at a
tipping point with class action liability, and third-party litigation funders, contributing to a situation that has grown increasingly dire for many Australian companies.”