On 4 February 2019, the Australian Government’s Royal Commission into the Misconduct in the Banking, Superannuation and Financial Services Industry Final Report was released (Report).

Many of the 76 recommendations arising from the Commission’s investigations pertain to consumer-based services and products (across banking, finance and insurance). However, there are impacts on business insurance policies which have not been addressed.

There appears to be a lack of trust in Australia’s financial system with particular emphasis on the banking sphere. The current challenge in the industry is on increased transparency and accountability.

In this article, we consider the implications the Report has on the provision of general insurance services. The immediate benefit to business is limited at best.

Overview of the Report

The Commission was tasked with inquiring into, and reporting on, whether any conduct of financial services entities might have amounted to misconduct and whether any conduct, practices, behaviour or business activities by those entities fell below community standards and expectations.

Four observations arising from the Report are:

• the connection between conduct and reward;
• the asymmetry of power and information between financial services and entities and their customers;
• the effects of conflict between duty and interest; and
• holding entities to account.

It is important to note that Commissioner Hayne QC primarily focused on the conduct by the financial services sector with consumers and small businesses rather than mid-large corporate business.

How does the Report impact on the provision of general insurance advice?

Part 3.2 of the Report considers Recommendations regarding providing financial advice.  In particular, Recommendations 2.3 and 2.6, outlined below, impact the provision of general insurance services.

Recommendation 2.3 – Review of measures to improve the quality of advice:

In three years’ time, there should be a review by Government in consultation with Australian Securities and Investment Commission of the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice.

The Government has introduced reforms to enhance the quality of financial advice, in particular, the reforms to increase the educational, training and ethical standards of financial advisers.

Recommendation 2.6 – General insurance and consumer credit insurance commissions:

In addition to the measures outlined in Recommendation 2.3, the Government should also consider whether each remaining exemption to the ban on conflicted remuneration remains justified, including:

• the exemptions for general insurance products and consumer credit insurance products; and
• the exemptions for non-monetary benefits set out in section 963C of the Corporations Act 2001 (Cth).

While this is confusing at best, the bottom line is that Mr Hayne QC is suggesting that premium commissions of any nature (life or general insurance) are inherently conflicted forms of remuneration for brokers as it compromises their core function of acting purely on behalf of their clients.

Mr Hayne QC believes that the broker should be paid by the consumer for their advice, not the provider of the financial product (bank/insurer/financial institution).

The Report suggests that as part of the recommended review by 2022 (which the current government and opposition have adopted) into the quality of financial advice, these commissions should be capped or removed altogether unless a compelling case can be mounted for them to be retained.

In the meantime, mid-large businesses should not expect to see significant reform from the Royal Commission until post 2022, at least in relation to commissions and insurance advice.

Our approach

McCullough Robertson together with Allegiant IRS continue to provide clients with a transparent and accountable lawyering and brokerage experience.

This non-conflicting business model keeps our client’s objectives and business needs as priority.

As per the expected findings of the Report, we continue to charge our services on a clear and upfront fixed-fee basis rather than taking commissions hidden within the premiums charged by insurance companies.

While we acknowledge the importance of, and embrace the significance, that the Report has on Australia’s financial sector with respect to small businesses, more needs to be considered for mid-large corporate businesses.

Background

Directors & Officers Insurance (D&O) is heading for a crisis point in Australia.  Insurers participating in D&O have written this class at or close to a loss for the last 6 years – and not just some small anomaly losses against solid actuarial data.  A 60% gross loss ratio (GLR) – (which is generally premium collected v claims paid and reserved) – is the target required to make money on this class of insurance.

Estimates place GLR’s at between 100%-215% on insurer D&O portfolios over the last 6 years.

So, why would they do this to themselves?  The answer, in its most overly simplistic form, relates to the macro-economics of how insurers make money; and D&O has little influence on this equation.

Capital floods into insurance markets seeking returns
+
Benign period of loss on catastrophe classes (property)
+
Insurer returns increase on investing premiums
=
Grab for market share by soft underwriting approach

Now, conversely, the opposite is happening.

Capital withdrawn for better returns elsewhere
+
Significant losses on catastrophe classes
=
Return to underwriting discipline and harder overall market conditions.

So why is my D&O policy being hit so hard?

It’s worthwhile noting that property insurance is also showing strong signs of a correction, as well as some areas of the liability and professional indemnity space – but nowhere near to the extent of D&O despite D&O being a tiny drop in the overall global premium / claims bucket.

The current GLR is the key element, but not the kicker moving forward for this class.

Class Actions: D&O

Increased class actions bought against corporations over the last 5 years (averaging around $300M in settlements per annum) in addition to further legislative changes have opened the way for plaintiff law firms to pursue broader types of class actions (consumer, public interest, natural perils, worker exploitation) in more states throughout Australia – making us one of the most favourable jurisdictions to lodge such a suit (behind the US of course).

Capacity and coverage drying up

As access to easy capital exits the insurance market, insurers are no longer accepting portfolio’s that are underperforming.  As overall return on investment diminishes, each division needs to be profitable in its own right – D&O is front and centre as it represents the largest claw back opportunity through underperformance.

It starts with ‘Side C’ cover – that section within the D&O policy that protects the entity itself from claims arising out of the securities (shares) of the company.  Insurers are either not offering this cover on renewal or are limiting their exposure to this ‘Side’ by considerably reducing the limits they extend while imposing substantial excess structures.

Securities claims, insolvency exclusions, restrictions on debt/equity raisings, withdrawal of capital/finance backing exclusions, tighter major shareholder exclusions, higher attachment points (i.e. not participating on primary layers) and reducing overall limits are the key areas of focus for insurers to trim cover and exposure.

Most insurers’ strategies appear to be broadly based on trying to grow profitability through shrinking their portfolios and risk attachments.

What does it mean to you?

It means that risk and audit committees, senior management and boards overall are now in a position of not being able to fully transfer many of the management risks that they could before.  Insurers are hardening with startling rapidity on excess structures, capacity and, of course, pricing.

There is still flexibility in the market, but only if the right messages are communicated – strategies are needed to demonstrate to insurers that the D&O risk is being properly considered and mitigated.

Just rolling over the D&O on renewal is no longer an option and directors should themselves personally engage with senior management to ensure that proper strategies are being employed to reduce the impact on coverage and premium.

Insurer selection, transparency, relationship management and conveying your individual risk profile personally is critical in helping to mitigate / curb these prevailing market issues and assist your company to stand apart during this market correction.

– Adam Battista, Allegiant IRS

– Brad Russell, Allegiant IRS

Legal developments affecting labour hire that elevate the importance of revisiting contracts and insurance programs

In the below downloadable article, we consider the implications of recent regulatory and common law developments for labour hire providers, principals and host employers.

Things you need to know

Changes in the regulations and common law affecting labour hire companies

There have been a number of recent developments with significant implications for labour hire companies and those who contract with them:

• Regulatory changes:
  • the passing of the Labour Hire Licensing Act 2017 (Qld) (LHL Act) – details of the LHL Act were discussed in McCullough Robertson’s earlier articles on 5 June 2017 and 7 September 2017, and
  • the passing of the Work Health and Safety and Other Legislation Amendment Act 2017 (Qld) (WHS Amendment Act) – details of the WHS Amendment Act were discussed in McCullough Robertson’s earlier articles on 25 August 2017 and 23 October 2017.
• Workers’ compensation:
  • the introduction of ‘black lung’ legislation known as the Workers’ Compensation and Rehabilitation (Coal Workers’ Pneumoconiosis) and Other Legislation Amendment Act 2017 (Qld) (CWP Act) – details of the CWP Act were discussed in McCullough Robertson’s earlier articles on 28 June 2017 and 12 September 2017, and
  • ongoing workers’ compensation premium pressures.
• Common law liability, the prevalence of contractual indemnities and the contractual requirement for labour hire to insure for hosts or principals.

What you need to do

Review of contracts and insurance

At a minimum, labour hire providers and those who contract with them must:

• ensure proper registration of labour hire providers and consider exposure in the event the legislative requirements for registration are not met, and
• urgently review all contracts and insurance programs in place to ensure there is insurance in place that responds to:
  • black lung legislation
  • charges for industrial manslaughter introduced under the WHS Amendment Act, and
  • contractually assumed liabilities (this is equally important for companies benefitting from a contractual indemnity, as without proper insurance in place, the indemnity may not able to be effectively enforced).

In the full article, we have highlighted the contractual and insurance solutions that McCullough Robertson and insurance brokerage Allegiant IRS can assist your business with in order to best manage both emerging and ongoing risks in the face of increased regulation in the labour hire industry and the prevalence of contractually assumed liabilities, such as:

• contracting pillars training
• statutory liability insurance, and
• public liability insurance that:
  • responds to contractual risks, and
  • extends cover to principals and host employers.

Please click here to download the full article.

Background

Once thought eradicated from the Australian coal mining industry, coal workers pneumoconiosis (CWP) has been re-identified. According to the Queensland Government, as at 14 June 2017 there have been 22 confirmed cases of CWP reported to the Department of Natural Resources and Mines since May 2015, with a sharp escalation anticipated.

The parliamentary committee inquiry into CWP in noted “catastrophic failings” in QLD.

What is Black Lung?

Pneumoconiosis is a potentially fatal disease caused by prolonged exposure to coal dust, more commonly known as “black lung” because those with the disease have lungs that look black instead of a healthy pink.

And it’s not just underground, confined space mines that are contributing to the disease – 2 of the 22 cases confirmed only worked in open cut mines throughout their careers.

The Problem(s)

17 of the top 20 ‘dustiest’ coal mines are in Queensland according to the latest National Pollution Inventory which assessed emissions for the 2015-16 period.

While management of CWP is a workplace health and safety issue facing all industry participants, the correlation between emissions and the escalating cases of CWP in Queensland are too coincidental to ignore.

Insurance Implications

Workers Compensation insurance will generally respond to cover workers for medical expenses and potential common law claims against their direct employers.
However, claims from contracted and labour hire personnel will land squarely on Public Liability insurance programs of mining companies and their head contractors. In respect of establishing indemnity, comparisons may be drawn to the asbestos decisions made on James Hardie; i.e. liability allocated based on time spent at exposed sites.

While CWP will not be as broadly devastating by volume case count as asbestos related claims; from an insurable risk perspective, insurers will be very sensitive to the future exposures they face.

In asbestos cases, most of the liability exposure has rested with manufacturers and in the case of CWP the majority will likely rest with the coal mines. As with asbestos claims, by the time CWP sufferers bring claims against coal mines, WorkCover will have paid substantial statutory compensation to CWP sufferers including (under the proposed Workers’ Compensation and Rehabilitation (Coal Workers’ Pneumoconiosis) and the Legislation Amendment Bill 2017 recently introduced to Parliament) lump sums of up to $120,000.

WorkCover will have a first charge on any settlement/judgment payments by coal mines to CWP sufferers. The critical issue here is can the Public Liability programs respond adequately under the current (and historic) terms and conditions imposed by insurers?

Asbestos is now an industry standard total exclusion on Public Liability insurance. We have seen some insurers introduce ‘Silica’ exclusions in the last 5-10 years and expect them to potentially broaden the current exclusions dealing with dust inhalation to capture CWP specifically to remove potential technicalities.

What is the ‘go forward’?

Managing the issue through screening and early identification is already on the agenda for Government, but has the horse bolted? Given the emissions and increased case count in Queensland, we expect to see far more incidents before the exposures are reduced through dust management initiatives.

The long-latency of the disease will pose similar issues to asbestos with industry participants potentially needing to look retrospectively at the Public Liability insurance programs held over the last 10-30 years as new and previously unidentified cases become known.

– Adam Battista, Allegiant IRS

– Brooke Jacobs, McCullough Robertson