Navigating Uncharted Terrain

The challenges before the Australian insurance industry.

Australian Insurance Industry Challenges
Richard Wood

Richard Wood

September 3, 2021 03:00 PM

Was there a recent ruling or precedent set that will have a national impact on this specific practice area?

The Australian insurance industry, like the global industry, is facing unprecedented challenges—some of the most difficult it has experienced in recent times. Effective and efficient risk mitigation is paramount as insurers battle increasing pressure from a number of fronts across all sectors. At the same time, in navigating through these issues, insurers have been presented with opportunities to identify new ways to service the needs of their customers.

Featuring throughout this disruptive new order are a number of key recent decisions, rulings and regulatory responses that continue to impact the risk landscape:

  • increasing cybersecurity and privacy exposures as insurers explore digital customer experience solutions
  • increasing frequency of major weather events
  • the continued prevalence of class actions in a jurisdiction already well known for being “class action-friendly”
  • implementation of new compliance requirements and regulations following the financial services Royal Commission
  • introduction of mandatory insurance requirements for design and construction practitioners
  • addressing key liability, damages and limitations relating to abuse and sensitive claims matters, and
  • prioritising the protection of the public in assessing matters involving misconduct by health professionals.

Front and centre currently is the uncertainty surrounding business interruption cover for those impacted by COVID-19, following the test case defeat in the High Court in June this year. This judgment upheld the initial 2020 NSW Court of Appeal decision, finding in favour of policyholders and denying insurers’ application for special leave to appeal. The primary decision was relevant to claims lodged across Australia.

It is estimated that more than 250,000 business interruption policies with claims valued at around $10 billion are affected. For many businesses, these policies have been tailored by their broker for their individual needs. Due to these complexities and variations, clear direction and guidance via the courts is required for decisions to be made in a fair and consistent way.

A second test case will determine a range of policy wording matters, including policy descriptions around the proximity of a COVID outbreak, how diseases are defined and regulatory requirements.

While the industry grapples with the consequences of this decision, the Insurance Council of Australia warns claims may not be finalised until the conclusion of the second test case, which is scheduled to be heard in September 2021.

Have there been any major developments or changes that could impact your clientele?

The insurance market in Australia has traditionally been a relatively attractive market for insurers – the one problem being pricing. In recent years the market has hardened considerably due to a number of factors and developments that have impacted Gilchrist Connell’s clients and the market at large.

These include:

  • uncertainties surrounding COVID-19;
  • increasing financial pressures resulting from:
    • low interest rates
    • increased claims costs arising from a raft of recent major and costly natural disasters and the associated rise in reinsurance costs
    • industry-wide decline in customer retention as Australian households continue to battle social and economic impacts of the COVID-19 global pandemic, global recession and a sluggish post-GFC recovery while facing increased insurance costs
  • harsher regulations and an increase in securities class actions as a result of the Hayne Royal Commission
  • implications of operating remote workplaces, including employment practices liability and cybersecurity as a result of COVID-19
  • issues such as cladding and increased regulation of the building industry and associated consultants, and
  • increase in litigation funding of class actions, with two act ions currently in train involving major onshore insurers while awaiting the outcome of September’s second COVID-19 test case.
The risks associated with remote working have created new opportunities for cyber-attackers, including phishing and social engineering events. In addition, claims relating to coverage under cyber, media, and technology errors and omissions policies have increased due to the pandemic.”

The key implications of these impacts are a continued hardening of the market and a shrinking appetite for Australian risk. These pressures have resulted in more restrictive coverage terms but have enabled those carriers with appetite to obtain more realistic pricing. For the first time since the early 2000s, insured entities are faced with a real dilemma as cover is more restricted, more expensive, and in some cases almost impossible to obtain. Brokers have their work cut out for them in many areas.

While COVID-19 initially caused a spike in travel and business interruption claims (before the pandemic exclusions were quickly updated and tightened where necessary), its impact on the way we work, with most adopting a hybrid working model combining home and office locations, has also led to employer risks and demand for legal services. We have experienced this effect firsthand at Gilchrist Connell, as our national employment practices liability and workplace practice teams have experienced extraordinary growth over the last 18 months.

We have also seen growth in cyber claims as the demand for specialist legal expertise has increased. The risks associated with remote working have created new opportunities for cyber-attackers, including phishing and social engineering events. In addition, claims relating to coverage under cyber, media, and technology errors and omissions policies have increased due to the pandemic.

Regulatory change and social attitudes have also led to an increased frequency of environmental claims. The combined impact of the hardening market and the pandemic will mean some covers will be affected by new regulations. Insured entities need to fully evaluate their risk management as insurance coverage might not provide the complete protection it once did. All these factors are expected to lead to an increased demand for legal services as more issues arise relating to the availability and scope of insurance programs.

These major impacts have meant that insurance lawyers have been exceptionally busy. All indications point to this hardened market remaining in place for the foreseeable future. To meet the increased demand, we have experienced significant growth across the country, increasing our workforce by 30% in recent months.

Looking forward for our insurer clients, a focus on managing costs, claims ratios and margins driven by the desire to increase profitability will result in price rises and limited scopes of cover. These responses are likely to have wider business and economic implications, and for the industry, reduced capacity may require brokers and insureds to work harder to source appropriate coverage. This process, in turn, might give rise to still more disputes. There are, however, already some signs of opportunity, with new carriers gently looking to explore markets that were previously too poorly priced for them. The correction in this regard will continue to translate to opportunities for insurers.

We expect this to lead to an upsurge of demand for legal advice around navigating the new risk landscape, including assisting insurers to reconsider the levels of risk they are prepared to bear and deliver more flexible, cost-effective, tailored insurance policies rather than relying on off-the-shelf insurance solutions.

Is there thought leadership your firm is uniquely poised to offer others in this industry?

We believe in investing in strengthening our expertise in each area of insurance law to provide our clients with market-leading advice and tailored solutions to achieve the most commercially beneficial outcome. We also believe invaluable knowledge transfer, sharing industry insights, legislative updates, market trends, and threats that could impact our clients.

Covering all areas of insurance law, we share our insights through multiple channels, including publication for authoritative articles, updates, and practical guides, and specifically tailored educational sessions and programs. We regularly contribute content and expert commentary to Australia’s major insurers, business press, insurance, and legal titles and media and frequently present at influential industry forums.

Consistently recognised and ranked in the Best Lawyers in Australia, Gilchrist Connell is proud to have a team of leading insurance specialists with expertise in all areas of insurance law spanning the country and servicing our clients all over Australia and abroad.

Recognised as a pre-eminent leader in the Australian insurance industry, Richard Wood is the Managing Principal of Gilchrist Connell. A true expert in insurance law having practiced exclusively in area for over 30 years, Richard provides his clients with unrivalled experience across the entire insurance law sphere, including general liability, financial lines, professional indemnity, general and product liability, construction, property, personal injury life and total and permanent disability claims and directors’ and officers’ liability, as well as advising on claims and risk management issues and recoveries across all claims types.

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