Capacity constraints mar insurance availability
by Resolve Editor Kate Tilley
We’re in very uncertain times and insurers don’t like uncertainty.
That was the message from Robin Cooper-Driver, head of long-tail lines, Asia Pacific, for Zurich Financial Services Australia, at the AILA Queensland Insurance Law Intensive.
He said the pandemic, coupled with an adverse insurance cycle, had created a very capacity-constrained environment.
The problem with long-tail insurance was “we don’t know for three or four years if we’ve charged the right premium. We invest the premium while we wait to find out”.
In the past, insurers could run long-tail books with a combined operating ratio above 100% because of good investment returns, but that was no longer the case. “Rates are so low we have a premium sufficiency problem in the industry. We need to reset the portfolios,” he said.
Social inflation was important in casualty lines and the cost of compensation claims was increasing.
Three or four years ago, construction industry professional indemnity (PI) was cheap and easy to buy, but the Grenfell Tower disaster in the UK and other cladding issues, including imported nonconforming products, had changed that. It was becoming more difficult to determine who was responsible for a failure, like combustible cladding on buildings, and that made claims more complex for insurers. That created “a spike in pricing” and a capacity shortage.
The financial services royal commission had created problems for financial institutions’ PI, so insurers needed to think about increasing reserves as IBNR claims increased. Mr Cooper-Driver said the royal commission also “threw up moral hazard issues”. “Should we insure costs? The market has a better lens on what is and isn’t insurable. But Australian legislation is rubbery around fines and penalties being insured. We must think about how we can avoid moral hazards.”
Mr Cooper-Driver said D&O claims frequency had accelerated materially. From one to three cases a year a decade ago, there were now 12-14 a year. “Limits are up, premiums are up.” He said Australia’s disclosure rules had the balance wrong, but there was no likelihood of fast change at the federal level.
Workers’ compensation claim frequency was increasing, particularly in Victoria, and there was an increase in recovery actions. “Some workers’ compensation authorities may have used the downtime to go through their bottom drawers and get old cases,” he suggested. Silicosis deaths and injuries, particularly in Qld, were a “head wind” for the long-tail market.
Other looming issues were cyber crime – Australia had many more ransomware attacks than in Europe; climate change, particularly with Australia’s bushfire risk which had already spawned litigation; and wage underpayments.
But Mr Cooper-Driver said he was optimistic, and the industry served a valid purpose. He expects capacity to slowly increase as the market corrects itself. “There are new shoots of capacity, which will ease the problem.”
He said insurers need to be more customer-centric and be enablers of good decision making by their clients.
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Resolve is the official publication of the Australian Insurance Law Association and