Introduction
The Directors’ and Officers’ (D&O) insurance market for Australian policyholders has seen a period of positive transition in 2024 driven by new markets citing their ability to support premium reductions. This has been welcomed by businesses who have been facing a challenging economic environment as a consequence of high interest and inflation rates which in turn placed pressure on their financial performance. We caution clients about the coverage and claims management philosophies of some new market entrants compared to long-established markets.
Businesses which are seen as being a favorable risk have been experiencing flattened or reduced D&O premiums however the construction, healthcare and technology sectors have seen higher rates overall as claims within these sectors have pushed premiums upward.
The risk landscape is continually evolving and although premium decreases are still prevalent, we have seen the pace of reductions slowing. Australian regulators have pursued companies and their boards more aggressively, expressing intent to pursue companies for regulatory breaches, particularly in the cyber, privacy and greenwashing space. We expect the pricing and availability of D&O insurance may be subject to future volatility.
Key trends for boards:
1. Cyber and privacy risk
Cyber-related exposures for companies and their boards will materialise further when changes to the Privacy Act 1988 (Cth) are introduced in 2025. This Act will introduce a new statutory tort for serious invasions of privacy, enhanced regulatory powers for the Office of the Australian Information Commissioner (OAIC) and targeted criminal offences to respond to doxing, just some of the changes outlined.
These changes mean we are likely to see a new set of exposures for consumer class actions against more organisations (not only those in the public eye) following data breach events, similar to the Optus and Medibank scenarios. Organisations operating in the technology sector specifically will be held to a higher standard when it comes to data and security protection.
ASIC has also warned directors of financial services licensees that they will be aggressively pursued should they fail to have adequate controls in place to prepare for potential future attacks.
Insurers are now expecting to see Business Continuity Plans and Disaster Recovery Plans which detail how businesses will respond to a cyber incident and to demonstrate, at least, an annual consultation and testing of these plans. Understanding cyber trends and implementing effective protections are essential steps for businesses aiming to navigate the complex cyber threat environment and ensure long-term resilience. See our article here.
2. Artificial intelligence
While AI can be used to provide data and support to corporate decision makers, as a D&O risk it can lead to questions as to the adequacy of oversight and due diligence.
AI technology may ultimately end up producing incorrect information and presents ethical concerns with respect to data privacy and protection thus, potentially adversely impacting overall corporate transparency. Consequently, shareholders may hold boards accountable for AI related failures, resulting in costly claims and losses.
We recently reported on new guidelines published by the Australian Cyber Security Centre to assist business engage with AI here.
3. ESG related disclosures
ESG activism continued to impact publicly listed companies with board members being held accountable for upholding companies’ commitments to environmental and social initiatives by shareholders, regulators and the general public.
From 2025, new mandatory climate-related financial disclosure obligations will commence following amendments to the Corporations Act 2001 (Cth). These obligations will require companies to issue an annual Sustainability Report, with the directors issuing declarations of reasonable steps of compliance, further detailed in our article here.
It is expected that the new sustainability reporting standards will further exacerbate climate change litigation and subsequent D&O losses for non-compliant companies. We expect claims to be made against companies, and in some cases against directors and officers directly, seeking damages for non-disclosure and or misleading and deceptive conduct in reporting or marketing sustainability.
4. Securities class actions and Insolvencies
SCA filings have decreased in 2024, with consumer, financial product and employment class action claims headlining new filings. This decline has been led by record low shareholder class action filings and insolvencies at the listed level.
However, Side C action risk still remains a significant factor for publicly traded companies in Australia and boards must turn their minds to exposures such as litigation and potentially large-scale D&O losses, especially considering upcoming developments in the data privacy and climate change landscape.
Summary
In summary, whilst overall market conditions are favorable and have improved with decelerated premiums and increased capacity, it is unlikely that prices will continue to decrease long term, especially considering the evolving ESG environment and changing regulatory landscape.
Companies who have poor loss history and are not implementing sufficient risk management processes will also remain susceptible to premium increases and possible coverage difficulties.
We expect new insurers will continue to enter the market offering significant cost savings, with established carriers maintaining stricter underwriting standards and stabilising their rates to avoid potential pitfalls with underpricing.
For further guidance on navigating emerging D&O exposures including cyber, ESG, and AI risks, get in touch with your Bellrock Advisor.
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