Directors' and officers' premiums on rise due to class action payouts
The total value of class action settlements reached $506 million last year, which was up from about $200 million in 2007, according to a report by the law firm King & Wood Mallesons.
With class actions becoming more common and with increasing responsibilities for directors under new regulations, insurers say directors' and officers' insurance is becoming less profitable for them.
This forces them to reduce limits or increase premiums.
Some directors have already started increasing their indemnity, says Julie Hamilton, a national directors' and officers' insurance specialist at Aon Risk Solutions.
While the cost of insurance has not increased substantially - because there are still many willing insurers in the market - she warns this may not last.
"While insurer competition is continuing to suppress rates, some insurers are testing the waters by seeking opportunities for modest rate increases where circumstances allow," she said.
Some directors of ASX-listed companies have recently increased their indemnities after benchmarking their policies against peers and claims data.
Directors who specifically chose not to take coverage against class actions could get a discount, Ms Hamilton said.
A spokesman for insurer CGU confirmed the market remained competitive but said the company was "keeping a watching brief on the issue and is closely monitoring claims costs".
"Claims payouts for directors' and officers' insurance have also risen," he said.
Frequently Asked Questions about this Article…
Premiums for directors and officers insurance are rising because shareholder class actions and their payouts have increased, and new regulations have added responsibilities for directors. Insurers say the business is becoming less profitable, which is forcing them to consider reducing policy limits or increasing premiums.
According to law firm King & Wood Mallesons, total class action settlements reached $506 million last year, up from about $200 million in 2007 — a substantial increase that is putting pressure on D&O insurance costs.
Insurers are responding by testing modest rate increases where they can, reducing coverage limits in some cases, and closely monitoring claims costs — although competition among insurers has so far kept major rate hikes at bay.
The market remains competitive today, with many insurers still willing to underwrite D&O risk, which has helped suppress rates. However, industry specialists warn this may not last as claims costs and class action frequency rise.
Yes — some directors, including those at ASX-listed companies, have increased their indemnities after benchmarking their policies against peers and claims data to better protect themselves against growing class action risk.
Yes. Julie Hamilton of Aon Risk Solutions says directors who specifically choose not to take coverage against class actions could be eligible for a discount on their D&O insurance.
Yes. A spokesman for insurer CGU confirmed that claims payouts for directors' and officers' insurance have risen, which is contributing to insurers' closer scrutiny of claims costs.
Investors should watch company disclosures about directors' indemnities and any changes to D&O cover, as directors may increase cover or opt out of class-action protection. Rising claims and higher premiums could influence corporate governance decisions and how boards manage legal risk.
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