July 2024 Market Update – Management Liability Insurance

The normalising of higher interest rates and return to work policies continue to affect businesses.

Insurers remain focused on active implementation and review of policies and systems on a regular basis, especially to adapt to the current changing regulatory landscape.

Since our last market update in January, insolvency cover has remained difficult to procure and continues to remain at the forefront of insurers’ minds given current inflationary pressures affecting businesses coupled with rising energy prices.

According to ASIC’s latest insolvency data, from 1 July 2023 to 31 March 2024, 7,742 companies entered external administration, a 36.2 per cent increase on the previous corresponding nine-month period ending 31 March 2023 with construction (2,142), and accommodation and food services industries (1,174) representing the largest numbers. It is expected that the number of companies entering external administration by 30 June 2024 will exceed 10,000, a level not seen since the 2012–13 financial year. Insolvency claims will continue to be a feature of the claims landscape in the near term.

Insurers remain extremely cautious with regard to the construction and manufacturing industries, and are requesting current financial information. Where sound financial statements are provided this can work favourably and cover for insolvency risks is generally obtained.

Whilst emerging Artificial Intelligence (AI) platforms present opportunities for businesses they also reveal potential vulnerabilities as cyber-crimes have become more sophisticated. See our recent article here outlining the Australian Cyber Security Centre’s (ACSC’s) guidance for engaging with AI. Ransomware attacks have been dominant due to the rapidly evolving digital landscape we now live in, and it is expected that the number of cyber-attacks will continue to rise.

As a result, insurers continue to tighten policy language and underwriting standards to reflect increased risk exposures, and insurance premiums are expected to continue to increase as has been seen during the first half of 2024. Insurers now require that companies, and particularly their boards, can show that they have strong cyber risk management processes in place by having fortified networks, increased resilience, investment in cyber security and that they can integrate cyber insurance solutions to limit the impact of cyber-attacks. Organisations must now balance their growth in the digital environment with their privacy and data security obligations. Our full cyber market update can be viewed here.

Statutory Liability premiums have continued to increase due to the impact of occupational hazards, worksite incidents, and enquiries from regulators, especially within the building and construction industry, where claims are often subject to an Occupational Health and Safety investigation and potential prosecution actions. The legal costs to defend these actions (which cannot be settled) can reach $350,000 to $450,000. Insurers are prohibited from insuring fines and penalties in most jurisdictions.

Social and economic factors have also affected recent EPL claims. Social justice issues such as discrimination based on race, age, gender, and sexual orientation remain top of mind for employers and continue to affect businesses. Common types of EPL cases are in relation to unfair prejudice, wrongful termination, sexual harassment, and defamation of character.

From 12 December 2023, the Australian Human Rights Commission (AHRC) was granted new inquisitorial and enforcement powers to ensure that businesses and organisations comply with their positive duties under the Sex Discrimination Act 1984 (Cth) (the Act). As such, businesses must ensure internal policies and procedures are not only in place but are being actively implemented to ensure compliance with the positive duty obligation imposed by the Act. See our recent article here for further information on the new enforcement powers for AHRC to bolster workplace discrimination compliance. It is expected that this new sex discrimination legislation will result in fresh claims.

We expect to see premium uplifts of 10 to 15 per cent depending on industry, with firms laying off staff finding themselves at the higher end of the scale. As such, underwriters are seeking evidence of the economic and financial stability of companies.

Due to increasing digitisation, Social Engineering Fraud (SEF) loss frequency sits closely beside claims filed in relation to employee theft.

Within the construction industry financial loss caused by SEF is resulting in increased claims under the Crime section of cyber policies. This is because construction companies have large volumes of payments in and out of the business daily and they generally have low cyber security measures in place, therefore are increasingly targeted by cyber criminals.

Key factors that underwriters look at include employee count, asset growth, loss history, and the ability to demonstrate that there are robust internal controls and procedures in place.

For more in depth market updates by product class, profession and industry, please see our individual reports below: