The insurance industry is under-prepared for the effects of class actions, which are likely to grow in size and number.

An expert has warned that class actions are a big risk for the insurance industry because of the magnitude of potential claims in a small market.

“The Centro case, for example, saw a payout of $200 million from a directors’ and officers’ and professional indemnity pool of about $600 million,” says Finity Consulting Actuary Susie Amos.
 
While not all of the Centro payout came from insurance, Ms Amos says it and other big cases in the pipeline are sending insurers a clear warning.

“You could get three or four big claims that could wipe the pool,” she says. “We believe it’s a big risk, though it has not yet crystallised.”

Ms Amos and colleague Geoff Atkins gave a presentation to the Actuaries Institute General Insurance Seminar in Sydney recently.

It documented the rise of class actions since they were legalised federally 20 years ago and emerged in the shareholder area in 1999 with the AMP/GIO case, which involved misleading information in a takeover and led to a $112 million payout in 2003.

Ms Amos and Mr Atkins say the emergence of litigation funders, especially following the float of IMF in 2001, is facilitating shareholder actions that could not otherwise have been financed.

The number of overseas litigation funders in the market is expected to rise following recent legal clarification freeing them from having to obtain Australian financial services licences.

Already operators such as UK group Argentum Investment Management are operating in Australia and the Government is broadly favourable to the industry’s objectives, believing it helps enforce efficient market operations.

To date most class actions have concerned continuous disclosure breaches, negligence, anti-competitive conduct, misrepresentation, consumer claims and defective products. Data security and cyber fraud are emerging risks that are likely to become triggers for class actions in the future.

A number of class actions that could result in large payouts are currently under way.

They include ABC Learning, from which damages could be $100 million; SP Ausnet, with hundreds of millions possible; the Lehman case, which is awaiting a decision on damages that could be $250 million; a bank fee case that may cost ANZ $220 million; and a $1 billion-plus action by former shareholders in Great Southern.

Last month NAB settled a class action delivering investors $115 million – $50 million provided by insurers – for breaches of continuous disclosure.

In another recent case the Federal Court found ratings agency Standard & Poor’s and investment bank ABN Amro “deceived and misled” 12 local government bodies that bought inappropriate investment securities.

While the S&P case is not a class action, Ms Amos says it is significant because “it’s a world first that sets a precedent for global financial crisis losses” and may pave the way for future class actions.

She says the Australian insurance industry is not fully prepared for class actions.

“From our knowledge, we’ve not seen separate pricing for class actions. We’d say insurers should consider pricing them like catastrophe insurance.”

US insurers typically offer separate strands of D&O to cover shareholder actions but this is not happening in the Australian market.
 
Australian insurers are slow to publicise reserves set aside for class action cases “until they’re certain to pay out, and that could be due to concerns they’ll be liable to pay those amounts if there’s early publicity on them”, Ms Amos says.

She believes actuaries must consider the danger of class actions and bring them into their calculations.

The availability of D&O insurance in fighting class actions is in question following the Bridgecorp ruling in New Zealand.

That judgement said insurers can’t advance defence costs to directors and officers who face third-party claims much larger than their D&O cover.

That decision is under appeal in New Zealand and is also being tested in the NSW Court of Appeal as part of the Great Southern class action.