Phillips Fox partner Michael Gill reflects on a year of upheaval in the insurance and financial services industry and considers directions in the coming year for a no-longer complacent industry.
2001 was the year when risk came storming back!
For much of the second half of the 20th century, succeeding generations increasingly convinced themselves that risk was avoidable or manageable and that security could almost be taken for granted. Although, according to some, life was not meant to be easy, it was certainly feeling pretty easy! A major factor in the protection of life and assets was the role of the insurance and reinsurance industries, which seemed capable of measuring and insuring just about any risk. It did so for a price that was within the reach of most people and businesses, and provided the protection through ever broadening wordings and despite increasing law suits and liabilities.2001 has destroyed a number of these key assumptions, perhaps forever. For the general insurance industry in Australia, two collapses, six months apart, shook our complacency and changed the landscape radically. On 15 March Australia's second largest general insurer, HIH, was placed into liquidation. On 11 September the immediate impact of terrorism destroyed a large part of lower Manhattan and killed thousands of people.
The causes of the collapse of HIH are the subject of a Royal Commission which commenced in Sydney in September last year. In announcing the Royal Commission, the Prime Minister said that it would report to the government by 30 June 2002. That is highly unlikely. The terms of reference for the Royal Commission require it to make recommendations to the government on regulatory and other changes it finds necessary as a result of determining the causes of the HIH collapse.
HIH had become a major liability insurer in a range of markets and its collapse put particular strain on areas where it had become the dominant player.
The terrorist attack on New York is having, and will have, far wider consequences. Publications from financial analysts, actuaries and others, forecast the possible demise of a number of insurers and reinsurers amid speculation that the estimated losses were beyond the capacity of many to pay.
It did not take long for coverage litigation to commence, with actions already under way to determine the number of losses to which the relevant policies should respond.
Almost immediately, the insurance and reinsurance industry worldwide determined that the terrorism risk was not something which it could automatically insure. In many countries negotiations were opened with governments to try and find a cooperative solution. The industry has experienced mixed results in that regard.
The 11th day seems to have particular resonance throughout the industry. In addition to the catastrophic events of September 11 2001, the commencement of the Financial Services Reform Act 2001 (Cth) (FSR Act) on 11 March 2002 will have a profound impact on the activities of the whole Australian financial services sector at a time when there are many other significant challenges which the industry has to confront.
There remains much to be done over the next two years for organisations to ensure full compliance with this fundamental regulatory change.
Of similar consequence for business are the changes to the Privacy Act and to the Insurance Act as it affects the general insurance sector. While creating some short-term pain, these changes can only enhance the industry in the long term and introduce world best practice.
As the year drew to a close, a hardening and contracting liability market led to increasing calls to rein in plaintiff lawyers, restrict their advertising and introduce significant tort law and damages reform.
If only it were so easy! Our society has embraced a culture of 'blaming and claiming' and it will take much to turn it around. There is little doubt that the widespread availability of underpriced insurance contributed to this.
In Australia, throughout 2001, there was increasing evidence from a number of sources of a significant growth in the incidence of asbestos related injury and disease. This trend, coupled with the growing practice of the NSW Dust Diseases Tribunal to hear actions from interstate and overseas, has produced the potential for an alarming growth in the cost of these claims over the next decade. Government and other interested parties should appreciate the urgency of a re-analysis of the method of compensating these claims.
Internationally, the so called 'second wave' of asbestos claims has been impacting on North American defendants in asbestos litigation and, through them, the London insurance market.
A consolidating industry
St Paul, which had established itself in Australia only a few years ago, withdrew at the end of the year.
Prior to its collapse, HIH had sold its domestic lines businesses (mostly in FAI and CIC) to Allianz. Much of its commercial business (professional indemnity, directors & officers, and the like) was in the process of being sold to QBE.
AMP, after many decades as a major name in general insurance, effectively sold its GIO business (incorporating AMP general) to Suncorp Metway.
With the demise of HIH, these other moves effectively completed a particularly dramatic change on the liability and indemnity scene in the space of about five years. In the mid 90s the major players in most indemnity business, and much of the liability business, were HIH, FAI, AMP and GIO - now all are gone as general insurers.
CGU consumed Fortis and NRMA acquired the workers' compensation business of HIH and New Zealand's State Insurance.
There are now a wide range of 'risk management products' available in the global markets. Many of these are either insurance products, or have their origins in insurance products. The use of some of these instruments has received exposure through the Enron and HIH collapses. It will be interesting to observe whether there is a tailing off in the use of such instruments or whether they continue to evolve into even more exotic products.
In the courts
The High Court of Australia handed down a number of significant insurance related decisions in 2001. In Brodie v Singleton Shire Council and Ghantous v Hawkesbury City Council, the Court abolished the long-standing nonfeasance immunity for highway authorities.
In June, the High Court decided FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd. This decision goes some distance towards converting claims made wordings into occurrence wordings, and leaves a number of significant issues unanswered.
2001 was a year of industry upheaval and turbulence, brought on in equal measure by corporate collapse and terrorism. The full impact of these developments on the insurance and financial services landscape is bound to reverberate well into the coming year and beyond.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.