The insurance industry has defended its push for more oversight of litigation funders after key players appeared before a parliamentary inquiry into the class action system.

At yesterday’s round of hearings, the Insurance Council of Australia (ICA) and broker Marsh said reforms are needed to address the sharp escalation in premiums for directors' and officers' (D&O) cover or companies could eventually be priced out of the market.

Premiums rose at least 75% last year and an average of 88% in 2018, ICA Senior Policy Manager Tom Lunn told the Parliamentary Joint Committee on Financial Services and Corporations by video link.

He says the industry supports the role that class actions play in helping Australians access justice but warns the prohibitive cost of acquiring D&O in the current climate is not sustainable.

“Fewer insurers are now willing to provide this cover,” Mr Lunn said. “Those insurers who are willing to provide cover are increasing their premiums. They are also reducing coverage limits.

“This is making D&O insurance very expensive, and for many smaller listed companies the premiums may be close to unaffordable.”

The industry rejected a suggestion that it was seeking to water down the continuous disclosure regime for listed companies, which has been blamed for a surge in securities class actions. ICA had said in its submission to the inquiry a breach of these obligations can arise from an honest mistake as opposed to any deliberate intention to withhold information, and defending against such lawsuits can be very hard.

“The problem is that the law around continuous disclosure is very uncertain so there is not much in the way of legal precedent to guide both defendants and plaintiffs as to how a case might play out,” ICA Professional Indemnity Insurance Committee Chairman Ewen McKay told the inquiry.

“There are a number of reasons why you would settle a matter before it reaches final judgment in court. Very few cases regardless which side they are on have a 100% chance of success.”

Marsh Australia CEO Scott Leney acknowledged to the committee it “doesn’t sound fair” that companies with no prior claims history have been affected by hardening D&O premiums.

However he explained this is a “principle of insurance” and not a reflection of a fault with the business model, as was suggested by one of the senators.

“The losses of the few are paid for by the many and so the insurers that are looking to recoup the losses, which are largely among the big ASX listed companies, are having to charge insurance premiums across almost every client to try and get the type of premium pool that will be able to sustain future losses going forward,” Mr Leney said.

Mr Leney says many clients are under significant stress. Some have had to agree to excesses of up to half a million dollars in order to secure D&O covers, and in one extreme case, a client took on a deductible of more than $200 million.

Marsh was also pressed about the class actions brought by local councils against its subsidiary JLT. Asked if the class actions came about because JLT had “ripped off” the councils, Mr Leney replied he doesn’t have the details of the case as it is not under his remit.