Whilst the Financial Lines Departments of underwriters were successful in marketing these products to corporate clients, they were less successful in marketing them to SMEs.
Eventually, underwriters developed a solution to provide affordable Financial Lines Insurance products to SMEs by packaging up numerous products into one standardised form, with a shared aggregate limit of liability. The first Management Liability policies were composite products, where the stand alone products which Financial Lines underwriters offered were bolted together to form one new policy. Exposures were limited by combining all of the coverage sections in one aggregate limit, so that the cost could be kept to a minimum, thereby reducing the price barrier. By having one Policy, you only needed one proposal form, reducing the paperwork.
Whereas stand alone Financial Lines Insurance products contained a broad range of extensions to the base cover, SMEs did not generally see the relevance of all of the additional extensions and so, the cover in Management Liability Insurance policies was a much simpler form of the stand alone policies upon which they were based. A simple format, with affordable prices that was easy to transact: it was a formula which lead to the explosion in growth of the Management Liability Insurance market in Australia to an estimated A$100m premium pool, which has the potential to grow even further.
As Management Liability was a product designed for the specific needs of the SME market it had to be easy to transact. The ease of the transaction meant that Management Liability was a product that was well suited to an automated delivery model. This meant a single proposal form and was often transacted online. There were less questions and less documentation was required.
Standalone policies on the other hand each required separate proposal forms, needed to be separately underwritten and if an Insured was purchasing 3 or 4 products, they could quite easily have found themselves filling out 30 or 40 pages of forms as well as having to gather financial statements, risk management policies, Human Resources manuals, Employee Handbooks and claims data. Because the nature of the risks being underwritten was greater in dollar value and multiple limits of liability were exposed, underwriters were required to be extra prudent and make sure that they analysed all the data and assessed the risk, prior to issuing a quotation.
Furthermore, because Management Liability was a product with an aggregate limit designed for SMEs there needed to be a much lower entry point in terms of pricing than stand alone options.
Entry level pricing for Management Liability started at around $800, whereas similar cover individually underwritten on a stand alone suite of products, could be anywhere up to a multiple of 6 or more times that of an aggregate Management Liability limit. The pricing point of Management Liability made it an extremely attractive purchase for a growing number of SME clients.
There are numerous Management Liability Insurance policies in the Australian market place, each with its pros and cons and its own coverage sections, however most Management Liability policies extend cover to the following broad insurance covers:
- Directors & Officers Liability
- Employment Practices Liability
- Statutory Liability
- Tax Audit Costs
- Cyber & Privacy Liability
- Entity Coverage
- Crime Protection
Some Management Liability policies also cover more exotic exposures, such as Kidnap Ransom and Extortion insurance, Trustees Liability and private capital raisings; however the list above represents the most common grouping of Financial Lines coverage sections and extensions available in the market.
Stand alone products are generally much broader than Management Liability Products. They have more coverage and separate and higher limits of liability. They are designed for more complex business models and Insureds who wish to categorically offset their risks. Because they are broader and provide more cover, they are generally priced accordingly.
When you have a single product which includes cover for all manner of potential policy triggers, this is what actuaries describe as horizontal aggregate exposure: numerous covers on one shared limit.
Over the course of the last decade that DUAL has been providing Management Liability Insurance to SMEs in Australia the number of claims as a percentage of Policy count has doubled. When we have a look at our 2004 numbers, only 7% of policies experienced a claim. In 2013 , 14% of Policyholders had claimed on their Management Liability Policy.
But it's not just the number of claims that the market is seeing increase, the value of these claims is also rising as legal fees and cost of representation increase, as litigation funders become more aggressive, opportunistic Plaintiffs try their hand at litigation that may not have been attempted in a bull market when everyone is flush with capital and the legal environment becomes ever increasingly pro - plaintiff. Over the last decade, the average cost of a Management Liability claim has doubled from just under $11,000 to over $22,000, yet premiums haven't kept up with the increasing loss ratios, driven down by a soft insurance market and ever increasing competition.
There are numerous reasons for the sharp increase in claims frequency and cost. The Global Financial Crisis ( GFC), which decimated world financial markets and its knock on effects to the broader economy has certainly played a significant role. But there is no single reason which can explain the increasing claims trend for this class of business. Some of the contributing factors which have lead to the decline of the portfolio include, but are not limited to:
- Repeal of WorkChoices and the introduction of the Fair Work Act, increasing the frequency and severity of employment claims;
- The Privacy Act Amendments;
- Harmonisation of the National Workplace Health & Safety Act Regime;
- Introduction of Anti-bullying amendments to the Fair Work Act;
- Increases in the number of ATO audits;
- Increased regulation and red tape for industry;
- A globalised economy exposing companies to multiple legal jurisdictions;
- The end of the resources boom; and
- The ever-present impact on society of gambling and drug addictions, which contribute to the prevalence of fraud.
For many years, Management Liability Insurance contributed to the exponential growth trajectories for many Financial Lines underwriters who benefited from the broadening of their target markets to include SME clients. Clients who previously never would have purchased a Financial Lines product. However the products success was also a contributor to its deterioration. Post GFC, the Management Liability product class experienced declining loss ratios, increasing claims costs and a soft market which further contributed to the product class testing the limits of profitability for underwriters who had entered the market early. The ever present push to grow saw Management Liability offered to an ever-increasing target market and to many where the cover may not have been the most appropriate available for the client needs.
But why did the loss ratios of the product spike so quickly? Most certainly, the lag effects of a long tail class of business following the Global Financial Crisis down turn had something to do with the turn around, however the elephant in the room was the fact that a class with significant horizontal aggregate exposure was being sold to a market outside that which it was designed to cater for: SMEs.
Management Liability as a product has developed significantly over the last decade, to the position we are in today where it's a must have buy for an increasing number of SMEs operating in an ever more litigious and risky macro - economic environment. Management Liability is an affordable and efficient way for SMEs to access a class of insurance which was once reserved for corporates, however the appeal and success of Management Liability as a product has started to draw some larger corporate entities to purchase the product, which, due to their size and complexity are better candidates for stand alone suites of Financial Lines products, which avoid the pitfalls of horizontal aggregate exposure and can be customised for their bespoke needs. The ease and simplicity of the way in which Management Liability was transacted saw an ever growing market drawn to them.
Management Liability Insurance is sometimes viewed as the panacea to round out the insurance programs of an organisation. It fits neatly in with PI, ISR and Property to round out the list of general exposures an organisation faces. For some Insureds though, a packaged product isn't actually the answer to all of their problems. Not all organisations fit neatly within the Management Liability box and for some insureds, stand alone products with appropriate indemnity limits where cover can be tailored to meet their specific needs are a more appropriate solution.
The challenge for the Insurance market is to continue to adapt to client needs and find ways to transact stand alone products with the ease and simplicity, which has seen Management Liability evolve into such a popular product for a growing number of Australian organisations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.