D&O insurers are keeping a very close eye on class actions and ESG.
A large cross-section of the London insurance market was recently polled on their views about certain issues of real and immediate significance for directors and boards in Australia. Focusing on key developments in the past 12 to 18 months, valuable insight was obtained about their appraisal of these issues and implications for Directors and Officers (D&O) liability insurance in the future. This is of benefit to companies and directors alike, having regard to the increased cost of D&O insurance and the hardened market experienced in more recent years.
Data was collected during a three-part seminar series presented by the writers in conjunction with leading Lloyds broker Ed Broking. The series was attended by a significant number of underwriters from more than 20 insurers/ syndicates who write D&O insurance in Australia — from small family businesses to ASX 100-listed companies. Topics of particular interest included ESG (including climate change related risk and diversity), cyber, the impact of COVID-19 and developments in the class actions space.
There have been a number of well publicised and significant developments in the class action space in the past 18 months, including more frequent instances of competing class actions, regulation of litigation funders, the attack on common fund orders, introduction of contingency fee arrangements in Victoria and a proposed cap on litigation funding fees. In this context, of the underwriters who responded:
- 75% thought it too soon to tell whether there will be fewer class actions impacting D&O insurance in the longer term
- 50% considered the changed class action landscape gave greater confidence to write Side C cover, reporting greater confidence in writing at lower limits of indemnity
- 59% reported the litigation funding environment impacted their decision to underwrite D&O insurance in Australia
- 68% believed current trends in class actions in the US are impacting insurers’ preparedness to offer cover in Australia.
Insurers are increasingly aware of ESG factors impacting Australian businesses and associated risks insured under D&O policies. More than half of the underwriters who responded considered they had a fair level of understanding of ESG, with governance currently significantly most impactful. However, climate change is the area of greatest concern for future class actions and claims impacting D&O insurance. Two-thirds of underwriters who responded considered Australia was behind other countries in responding to ESG issues. That said, only 10 per cent considered they were well placed to assess a company’s level of engagement with and responsiveness to ESG issues, with the vast majority acknowledging the level of information provided can vary significantly.
D&O underwriters acknowledged difficulties in discerning how effectively companies are addressing ESG through the entire organisation.
After years of difficult market conditions, recent government initiatives and judiciary interventions are collectively seen as positive and may assist in stemming the overall reluctance to offer D&O insurance in Australia. Nonetheless, there remains a desire to wait and see how developments play out, in particular in the litigation funding market. It is clear that D&O insurers will be looking to the companies they are writing for assistance in better understanding the level of engagement with — and responsiveness to — ESG factors. Finding ways to show underwriters that ESG efforts are substantial and embedded throughout the organisation will be key to accessing insurance on the best possible terms.
Tricia Hobson and Carmen Elder are partners at law firm DLA Piper.
Despite efforts to push business to make payments faster, companies are stretched, according to new data from McGrathNicol Advisory.
By Nina Hendy
Average working capital cycles lengthened by 3.1 days this year, with an equivalent of $5.5b in additional cash “locked up” in the working capital balances of companies, McGrathNicol Advisory research shows. The average days working capital (DWC) increased in six of the seven sectors surveyed, and in 56 per cent of sampled companies, the Working Capital Report reveals.
The DWC increase was bolstered by companies collecting cash from their customers more slowly, and holding more inventory. To partly offset this, those surveyed admit to dragging their heels on paying suppliers.
The research, which explored how working capital cycles have changed in 2021, reveals that five of the seven sectors surveyed had 100 days spread between the best and worst performers. Australian companies also held 1.4 times more inventory on average than other regions. The three sectors with the largest uptick in revenues were mining and resources, agriculture and retail — driven by a mix of higher commodity prices and offshore demand, higher production yields, and consumers directing spending away from travel and recreational activities to retail.
McGrathNicol Advisory co-partner Jason Ireland says improvements to working capital will create a distinctive competitive advantage as companies enter the post-COVID-19 recovery phase. “Make no mistake, the only way to have more cash in your working capital, inventory and supply chain is to collect payments faster from your customers.”
Among the 137 ASX-listed companies surveyed were Elders, Boral, CSR, James Hardie Industries, Blackmores, Santos and Ampol.
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