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Risks pile higher in financial lines: Gallagher

Insurers are wary of emerging financial lines risks and are approaching directors’ and officers’ (D&O) and management liability renewals as if a fiscal cliff is imminent, Gallagher says.

The financial lines market has become an increasingly difficult area of insurance over the past 12 months, building on existing stresses.

“Financial lines premium increases have soared in recent years, but we’re fast approaching a viability tipping point,” Gallagher says in a Business Insurance and Risk Market Update released for the Australian market late last year.

In D&O, the potential for class actions remains an issue, particularly for ASX 200 companies. SMEs are also being examined for financial or solvency risk, given the potential end of Government support packages.

In general, insureds can expect greater scrutiny and requests for more information when claims are flagged or lodged amid the harder market conditions.

“The level of proof required around a claim is a lot higher than it was, and insurers are going deeper into confirming indemnity and the quantum involved – there’s a lot more microanalysis than we’ve seen in the past,” the report says.

Risks from employee home working, including from a health and safety perspective, have gained focus amid the COVID-19 pandemic, while cutting costs through staff lay-offs boosts the potential for wrongful dismissal claims.

High profile employment disputes, such as a case involving Israel Folau and Rugby Australia have also been noted by insurers. That dispute led to an out-of-court settlement of a wrongful dismissal claim concerning freedom of speech and religion.

Gallagher says firms seeking cover should show that strong mitigation processes and strategies are in place.

“Some of those factors that are provoking insurer nervousness can be softened by having, for example, the right policies and training for people who are working from home,” it says.

“For instance, by demonstrating that employees have been set up correctly in their dedicated home office and are given regular cyber training, some of those perceived risks can be downgraded.”

Cyber risks have surged with home working, with cover provided under specific cyber insurance, rather than through professional indemnity or public liability.

In mergers and acquisitions, deal numbers are expected to rebound after a slide in the past year as a result of COVID-19.

Fewer deals and more stringent terms in transaction agreements have seen insurers increasing their appetite for the “hairy” deals, or where there are known legal and tax risks, as they seek to deploy capacity and differentiate themselves.

“It will be interesting to see how this plays out over the coming months,” Gallagher says. “We expect to see an increase in M&A activity, particularly distressed deals, and deals involving ‘founder’ or family owned private companies that are being triggered into selling out.”