The stressed directors’ and officers’ market in Australia, plagued by capacity pullback from insurers and rate increases as high as 100% in the past few years, may have turned a corner, according to Aon’s latest industry update.

Signs of “green shoot” capacity from new market entrants, along with recent positive developments in the risk landscape such as increased regulatory oversight of class action litigation funders, have given Aon cause to feel “cautiously optimistic” as the second quarter gets underway.

Plans by the Federal Government to permanently ease disclosure rules for listed companies after changes were introduced last year during the pandemic are also seen as a positive for the D&O market, the update says.

“While [last year] held significant uncertainty, we are looking at 2021 with cautious optimism,” Aon says.

“As we enter [the second quarter], we are cautiously optimistic that the emerging signs of a more tempered legislative and case law environment will lead to greater D&O market stability in the medium term.

“We anticipate ongoing upward premium pressure for the balance of 2021, with some easing in the rate of change relative to 2020."

Securities class action litigation has been blamed for the troubled D&O market, forcing insurers to withdraw, cut back capacity or impose huge excesses and onerous conditions as well restrictions.

Australia is seen as having the most litigious environment outside of the US.

Aon says the substantial premium re-alignment secured by the D&O insurance market over the past three renewal cycles, and in particular the most recent renewal cycle, has placed the insurance market in a more sustainable position.

The Australian D&O premium pool has grown in excess of $800 million, Aon says, citing figures from actuarial firm Finity.

The broker says it expects pressure to remain on pricing, with insurers remaining cautious as they assess the evolving market situation.

They are seeking clear and sustained evidence over the medium term of a reduction in securities class action activity, Aon says.

Aon expects ongoing upward pressure on Side C deductibles to be tied to individual risk profiles. For large public companies, minimum Side B deductibles of $1 million are becoming more common.

Side C refers to Securities Entity where indemnity is provided to the company in respect of securities claims brought against the company by security holders.

Side B refers to Company Reimbursement with indemnity provided to the company where the company grants indemnification to its directors and officers in respect of claims brought against them.

“Insurers have a stronger appetite for participation on private company risks, particularly where those risks are less likely to be impacted by COVID-19,” Aon says.

“This is expected to continue through 2021, however the upward pressure insurers continue to place on premiums points to years of under-pricing, and the need to secure pre-established minimum rates per million dollars of capacity.”

Click here to access the report.