A Q1 lens on trends: the emerging landscape of general insurance in 2023

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13 March 2023

Economic inflation and the cost of business

Individuals and businesses are acutely aware of inflation and cost of living pressures heading into the second quarter of 2023. On 8 March 2023, RBA Governor Phillip Lowe provided a keynote address to the Financial Review Business Summit, making the following key comments:

As at December 2022, inflation was at a 30-year high of 7.8%. The RBA Board is resolute in its determination to ensure that inflation returns to the 2-3% range
Global inflation is a legacy of the COVID-19 pandemic and Russia’s invasion of Ukraine. The pandemic interrupted supply chains and forced an increase in prices. Combined with fiscal policy responses to the pandemic, this increased demand at the same time
The most recent data suggests that headline inflation has peaked in Australia, with the monthly CPI indicator dropping from 8.4% in December 2022 to 7.4% in January 2023. Household consumption increased by 0.3% (a general declining trend) in December 2022, but further reductions are expected in the coming months

Economic inflation pressure is known to have adverse impacts on construction projects (particularly residential), however increased resource and labour costs are also putting pressure on the construction industry and significantly increasing the cost of projects. The result was a spate of failed construction companies in 2022, with more expected this year.

In January, Master Builders of Queensland issued a statement on the shortages facing the construction industry. It comments on the causes of these shortages, including the run-off from COVID-era supply chain shortages, international events, a global surge in demand for building materials and the impact of severe weather events on the supply of natural resources.

'Building material prices remain difficult to predict with some materials continuing to increase in price. While some material prices are stabilising, such as timber and steel, others are not, for example, concrete.'

The Queensland Building and Construction Commission (QBCC) has responded to the supply chain challenges facing the industry with the implementation of the Accelerated Builder-Consumer Mediation Service, a temporary service implemented on 1 July 2022 to mediate disputes between builders and consumers. This will have the most significant impact on existing contracts, many requiring substantial variations to manage these issues and resultant delays to practical completion dates.

The 2023 Vero SME Insurance Index reported in January that two-thirds of businesses surveyed were experiencing major or moderate impacts from inflation, with 47% making some kind of change to their insurance policy as a result. These changes included increasing excesses, moving from annual to monthly premiums to manage cashflow, and in some instances moving away from the use of brokers in favour of direct insurance to reduce overall insurance costs. Of note, the ABS reports that weekly ordinary time earnings for full-time adults increased by 3.4% to $1,807 as at November 2022, another factor exerting pressure on businesses (including insurers).

Social inflation

Specific to the insurance industry, the phenomenon of social inflation captures increases to claims costs, aside from those generally related to economic inflation. An ongoing area of focus in recent years, social inflation remains one of the key issues for general insurance, with ongoing increases to claim costs expected to continue for the rest of the calendar year.

Two of the most significant factors contributing to social inflation in Australia include legislative changes, and litigation funding. In the instance of legislative changes, one of the most significant changes has been the removal, in all Australian jurisdictions, of limitation defences pertaining to historical child sexual abuse claims. On the litigation funding front, increased availability of funding and the expansion of class action claims is also exerting pressure on social inflation. Litigation funders are eagerly taking advantage of new opportunities in the class action area of litigation and expanding their investment portfolios accordingly (discussed further below).

In terms of overall claims spend, for reference WorkCover Queensland reported in its 2021/2022 annual report that its average cost of statutory claims was $11,713 (up from $11,108 in 2021) and that the average cost of common law claims was $191,167(a slight reduction from 2021). It also reported that:

For common law claims, mental disorders comprised 10.3% of claims in 2021, increasing to 12.4% in 2022
Musculoskeletal injuries were still, by far, the most common injuries (58%), with mental disorders the second-most common, followed by fractures, other injuries / diseases, and respiratory system diseases
Construction and manufacturing claims comprised 31% of all claims (938 claims)
Payments across statutory claims were 73% of the total, with common law claims being 27%
Common law total payments were $461 million in 2022, which, interestingly, was a slight decrease on the $486 million spent in 2021.

On 2 March 2023, APRA released its quarterly report on general insurance statistics for December 2022. Gross incurred claims for 2021 were $38.5 billion, increasing to $46.2 billion for 2022, a 19.8% increase. A series of adverse events in early 2022, including flooding in NSW and SEQ contributed to this increase. Net incurred claims increased by only 3% because of an increase in reinsurance recoveries offsetting the increase in gross claim costs. It also reportedly reflects an unwinding of provisions for COVID-related business interruption claims.

It is yet to be seen whether changes to the claims farming provisions in Queensland will have any impact upon social inflation. Changes made to the Personal Injuries Proceedings Act 2002 (PIPA), and the Workers’ Compensation and Rehabilitation Act 2003 (WCRA) now mirror the provisions previously implemented in the Motor Accident Insurance Act 1994 (MAIA) to prevent claims farming. The lack of reliable data on the potential scale of claims farming in injury claims prior to the amendments will make it difficult to measure the direct impacts of the legislative changes, but it is anticipated that it may reduce social inflation factors. For context, a 2018 study commissioned for the Motor Accident Insurance Commission (MAIC) reported that in an online survey of 800 adults, some 37% had been contacted by claims farmers in the prior 12 months.

In February this year, the Brisbane Magistrates Court handed down its first prosecution under the claims farming provisions of the MAIA, sentencing Accident Management Solutions to fines totaling $1 million for 94 offences. The action was pursued by the MAIC. Notably AMS entered administration during the proceedings, meaning recovery of the fines is unlikely, but the MAIC stated that:

'MAIC elected to continue the prosecution against AMS for a number of reasons, including to promote awareness about the unlawfulness of claim farming and to make it clear to the CTP industry and the public that claim farming practices must not be tolerated'.

Aside from these factors, Court delays and backlogs (many of which are lingering from COVID-19) are causing significantly longer claim duration, and as a result a propensity for larger damages awards when taking into account, for example, interest over longer periods of time. Delays in Court process also inevitably increase overall legal spend, on both sides of the bar table.

External administration, uninsured claims and underinsurance

Provisional ASIC data released on 7 March 2023 reveals that the number of construction entities entering external administration for the first time increased by some 52% between February 2022 and February 2023. Notable entities entering administration in the 2022 calendar year included Probuild and Condev Construction. Whilst the construction industry is the one most often seen in the media, the increasing cost of materials and labour can also lead to an increased risk of business failure in other fields.

The resultant flow-on effect is an increase in the number of claims pursued against a company under external administration or previously deregistered. This negatively impacts on the management of the claim by the company’s insurer due to:

Inability to undertake proper factual investigations into the circumstances of the alleged incident, and a lack of preserved documentary material, making it very difficult to defend claims. This results in an increased propensity for the insurer to concede key liability issues in the defence that might otherwise have been successfully challenged and reduced the overall exposure to the claim
Increased defence costs spend because of sourcing material through third party record requests or appointing investigators to locate witnesses who are no longer working for the entity and cannot be readily accessed
Further direct involvement of insurers in Court proceedings (including increased legal costs for both the plaintiff and insurer) in managing applications brought pursuant to the Corporations Act 2001 to facilitate the claim proceeding against the insurer directly (in lieu of the company) or leave being granted to proceed against the entity in administration
A higher rate of uninsured deductibles in claims, in some instances significant deductibles, resulting in potential inflation of claim settlements to mitigate the potential reduction of the ‘in hand’ settlement sum to plaintiffs.

Closely linked to these issues are the risks of under-insurance or lack of insurance. The 2023 Vero SME Insurance Index released in January indicates that the most prominent concern for surveyed businesses was economic concerns, with 36% ‘very concerned’ about the increasing costs of business. This risk of an economic downturn was a prominent concern for 25% of respondents.

In multi-party casualty claims, the increased cost of business and a desire to mitigate risks is also leading to an increased reliance on contractual indemnity or insurance clauses to minimise a principal’s exposure to damages. However, a lack of clear understanding of the effect of these clauses, or the triggering of policy exclusions stemming from these contractual indemnities, can expose businesses to significant risks, particularly smaller operators. Smaller sub-contractors, in particular, are at increased risk of reliance being placed on contractual indemnity and contractual insurance obligations. In certain instances, a failure on the part of the sub-contractor to comply with those contractual obligations can lead to a separate claim being pursued for breach of contract. Such a claim is often uninsured under the sub-contractor’s policy of insurance, increasing the possibility for partly uninsured components to the claim and for increased costs of litigation in resolving these disputes.

For household policies, a significant potential for underinsurance remains relevant this year. The Australian Institute of Quantity Surveyors reported in late 2022 that household underinsurance is now likely to have exceeded 90%, based on their data assessment. This is an increase from survey data collected for the Insurance Council of Australia in 2021 that suggested underinsurance for household policies was sitting around 83% at that time. Increased costs of goods and services by virtue of inflationary factors mean that policyholders may find themselves significantly underinsured if coverage has not been reviewed regularly.

The propensity for underinsurance or lack of insurance in Northern Australia as a result of the unavailability or unaffordability of policies in those regions at greater risk of flood and cyclone risks has been given a big boost, with the implementation of the Cyclone Reinsurance Scheme, which kicked into gear on 1 July 2022. The first two months of this year have seen the Pool welcome its first customers, with remaining major insurers due to join the Pool by the end of 2023. The Pool is designed to increase the availability of affordable insurance policies in these regions, ultimately reducing risks of underinsurance or lack of insurance. The launch of the Disaster Ready Fund has also significantly increased funding for risk mitigation measures. For more information on the latest developments with the Pool, and the Fund, check our recent Insight Article here.

Class actions

The prevalence of class actions in the Australian litigation landscape continues to grow with the types of claims evolving over time. Some of the original class actions claims were focused on product liability issues, but it is now clear that the securities claims in the banking and financial services sector are leading the charge. Other well-advertised class actions include those related to product recalls and alleged automotive defects. For example, on 16 May 2022, the Federal Court found in favour of the class in a claim brought against Toyota Australia for defective Diesel Particulate Filters (DPFs) in certain Hilux, Fortuner and Prado models.

On 8 March 2023, the Finance Sector Union (FSU) announced the launch of a test case in the Federal Court against National Australia Bank on the issue of excessive work hours, filed on behalf of managers who allegedly worked 50 to 80 hour weeks. It is being touted as the test case for what 'reasonable additional hours' are for white-collar workers and could have ramifications across senior professional and management roles throughout Australia. Interestingly, amongst the test cases is a banking manager who worked up to 60-hour weeks, allegedly developing back pain as a result. Issues relating to stress, anxiety, fatigue and exhaustion are all raised. FSU National Secretary Julia Angrisano stated:

'These relentless long work days are affecting the health of the managers, leading to them suffering stress, anxiety, fatigue and exhaustion. The negative health impacts of long hours will be examined in this case.'

If successful, the FSU will demand compensation for some 10,000 staff subjected to similar excessive amounts of unpaid work, plus large penalties against NAB for alleged breaches of the Fair Work Act. If successful, the concern is this could trigger a wave of class actions. A decision in this matter could also potentially have broader-reaching impacts on the nature of workplace claims more generally, and the scope of an employer’s duty of care to its employees with respect to monitoring and enforcement of work hours.

Cyber insurance

Cyber insurance is one of the most volatile and susceptible areas in the industry, with new cyber threats emerging regularly. Whilst there is some general industry suggestion that ransomware attacks have reduced slightly, the ongoing concerns around data breaches remain at the forefront of attention.

Significant data breaches were seen in 2022, including Optus (September), impacting some 9.8 million customers, and the Medicare Australia data breach (October). Maurice Blackburn Lawyers announced that a representative complaint had been made to the Office of the Australian Information Commissioner (OAIC) about the Medibank data breach. In December 2022, the OAIC announced that it had opened an investigation into the matter.

On 10 November 2022, the OAIC released its Notifiable Data Breaches report for January to June 2022. The top 5 sectors for notifiable data breaches included health, finance (including superannuation), education, legal / accounting / management services and recruitment services. 41% of all data breaches were the result of cyber security incidents with the most common being ransomware attacks (31%), phishing (26%), compromised / stolen credentials (25%), hacking (9%), malware (6%), and brute-force attack (3%). The top causes of human-error breaches, which comprised 33% of all breaches, were personal information being emailed to the wrong recipient, unintended release or publication of information, and personal information being mailed to the incorrect person.

Virtual Private Network (VPN) provider Surfshark has provided up-to-date global data breach monitoring statistics. In the last quarter of 2022, Australia was ranked as the 7th highest country for data breaches. South Sudan, China and India took out the top 3 highest positions respectively.

As a result of these large-scale data breaches, changes to the Privacy Act 1988 were fast-tracked, with the Privacy Legislation Amendment (Enforcement and Other Measures) Act 2022 passing through parliament and receiving royal assent on 12 December 2022. Among the amendments include significantly increased penalties for serious or repeated breaches (up to $50 million for body corporates) and greater investigative powers for the OAIC (including sharing powers with the Australian Communications and Media Authority). The obligations also extend to all organisations doing business in Australia, regardless of whether the personal information was collected in Australia.

Another interesting area in the greater context of cyber claims is the increasing awareness of the risks of 'sharenting', which is the sharing of content about a child by their parents or caregivers online. Concerns are being raised about the publication of this material including photographs / images, videos and personal information (including medical information). Disturbingly, a widely cited 2018 report by Barclays suggested that by 2030 around two-thirds of all identify fraud would be caused by information garnered from sharenting. The Australian Federal Police issue regular statements about the protection of children’s online information, including resources for helping teenagers navigate their own digital footprints. The interaction between a child’s pre-existing digital footprint and the heightened risks for cyber-attacks resulting in identify fraud is an issue that will evolve in the coming years, as the peak of the children growing up in the ‘sharenting’ generation reach adulthood and the efficacy of increased cyber vigilance and mitigation measures are tested.