2020 New Zealand Insurance Market Recap Series - Liability

A number of difficulties remain for the New Zealand liability insurance market as we move through the final quarter of 2020. The COVID-19 pandemic’s effect on the global economy and insurance market has added to a number of existing challenges.

Insurers remain conservative in their approach to underwriting and the deployment of capital. Along with premium increases for select buyers, underwriters are carefully managing exposure by seeking to restrict coverage terms, reduce limits, and impose higher retentions. This appears to be occurring not only when there have been material changes to risk (for example, turnover, claims, or business activity) but also when an insurer’s wider portfolio (either product or industry) has produced unsatisfactory underwriting results. 

Directors & Officers Liability (D&O) Market

The D&O market continues to experience widespread pricing and capacity issues. The evolving market for publicly listed companies in New Zealand (especially where company securities Side C cover is included) has been driven primarily by the securities class action environment in Australia and its impact on insurers’ underwriting performance.

Securities class actions have traditionally been characterised by allegations based on financial misrepresentation or omission. However, in recent months there has been an increase in event-driven securities litigation. Such litigation is prompted by an adverse event in connection with a company’s operations (for example, a cybersecurity breach or environmental issue) and a drop in share price results following the announcement of such an event. Consequently, shareholders may bring a class action against the company with allegations that the company should have disclosed this negative operational event earlier, which then potentially triggers a claim under the company’s D&O policy.

As a result of the significant impact the spike in shareholder class actions is having on the D&O insurance market, the New Zealand Law Commission is currently reviewing the scope and criteria of class actions as well as the impact of litigation funders in New Zealand. 

COVID-19’s Effect

The pandemic has further upset an already disrupted D&O market. Insurers have responded to COVID-19 by asking detailed questions about companies’ exposures during renewals, including the pandemic’s financial impact, organisations’ business continuity plans, the effect on employees and customers, and how companies are managing their disclosures. The government has supported directors with amendments to the Companies Act, allowing them “safe harbour” or breathing room for some of their obligations related to incurring trading debt under the act.

While this brings some comfort to public companies, directors must still act in good faith and insurers remain wary of how claims activity may develop over the next 12 months. As a result of this environment, we have seen further capacity restrictions and tightening of policy conditions throughout 2020. For New Zealand insureds specifically, there has been a vastly reduced insurer appetite for new D&O exposure, especially those including Side C with an Australian (ASX) listing.

Insurers are also concerned with employee exposure. Many companies are restructuring, downsizing, and exploring ways to manage costs and operate more efficiently, which will likely drive employment practices liability claims in 2021 alleging unjustified dismissal or discrimination. A number of restructurings to date are alleged to have been hastily implemented, leading to employee dissatisfaction and a greater potential for litigation.  

In Summary 

The challenging market dynamic we are seeing is not limited to D&O insurance. Construction companies are facing increased scrutiny over their professional indemnity exposures, following alleged company failures, project delays, and large losses, particularly with respect to long-term infrastructure projects. Architects and engineers have been increasingly scrutinised, with many insurers looking to exit rather than take corrective underwriting action. Financial services companies continue to be closely reviewed by insurers while regulators in New Zealand remain poised and ready for action; Worksafe and the Commerce Commission, in particular, are both fully resourced and focused on continuing to aggressively implement their mandate.

Despite the various challenges, insurers are still considering new opportunities and looking for areas where they can achieve profitable growth. The current investment climate demands an underwriting profit; as such, good quality underwriting information remains critical. Overall, insurers have been reluctant to increase exposure or provide terms for perceived higher risk lines or sectors. For the most part, however, insurers have provided favourable support to existing loyal and long-term clients.  

NOTE: This Liabilty report is a part of the 2020 New Zealand Insurance Market Recap Series – a series of local market insights by insurance class, with a specific focus on the state of market in New Zealand. Other insurance classes featured in the series include: 

• Property Insurance Market Recap 
• Cyber Insurance Market Recap