Class actions, climate and regulation front of mind for insurers

Date: Thursday, May 12th, 2022 by dev.login.

While positive growth is predicted in the insurance space this year, the issues that defined 2021 remain prominent in 2022, says one BigLaw firm.

Global Insurance Law Connect (GILC) has launched its fourth annual Risk Radar report, which aims to capture the important legal, regulatory and socioeconomic issues facing insurers in each country in which GILC operates. This year’s report outlined key insurance issues across 23 countries, including Australia.

Representing Australia, national law firm Sparke Helmore provided commentary for Australia.

Globally, the report identifies issues that plagued practitioners in the insurance space in 2021 as again being prominent in 2022. These include the rise of digitisation and cyber risk, increased climate risk, and regulatory change, “with insurers having to continue to adapt”.

Reflecting on the state of affairs, Sparke Helmore partner and national practice group leader for commercial insurance Malcolm Cameron said that the global issues of climate change and sweeping regulatory reforms “particularly resonate in Australia”.

“While we have seen limited traction in our market from global insurance trends such as M&A activity, disruptor insurtechs and the social inflation phenomenon,” he said.

“With the current annual cost of AUD$38 billion attributed to natural disasters, the insurance industry is committed to a proactive approach to climate resilience, with the affordability and availability of insurance an area of focus.”

“Regulation remains a hot topic for the industry with 2021 marked by the introduction of a new Insurance Code of Practice and other far-reaching reforms, with many effective from January 2022. But this is not the end of it with many more reforms slated for the remainder of 2022 including a new Insurance Brokers Code of Practice,” Mr Cameron added.

The third leading issue for Australia, Sparke Helmore outlined, are class actions, given increasing restrictions for third-party litigation funders.

“Late 2021 saw a swift rise in class actions, but this is expected to decline in 2022 if the intended legislative reforms — including the introduction of a cap on the amount funders can recover from the settlement proceeds — are passed”, the firm noted.

Class actions

The above proposed reforms may, of course, be delayed or derailed altogether, depending on the outcome of next week’s federal election.

This said, the proposed reforms remain a top consideration for those in the insurance space, Sparke Helmore noted.

“Class actions reforms since late 2020 have focused on third party litigation funding, requiring funders to hold an Australian financial services licence and for litigation funding schemes to be registered as managed investment schemes and comply with all associated laws (including the provision of a product disclosure statement to members),” the firm said.

“Current legislative reforms seek to introduce a cap on the amount funders can recover from the settlement proceeds. The reforms also require a funder to ‘sign up’ group members to the scheme or risk having its costs unpaid.”

Climate change

Climate change is expected, Sparke Helmore went on, to result in more severe cyclones, droughts, bushfires and floods in Australia — adding to the already extraordinary aforementioned costs associated with such natural disasters.

However, the insurance industry is “committed”, the firm said, to remaining proactive.

“This has been exemplified by the devastating flood catastrophes throughout Queensland and NSW in February/March 2022. ‘Flood exclusions’ in insurance policies have been front of mind, with many individuals and businesses who were unable to afford expensive flood cover premiums left uninsured,” it penned.

“With losses already exceeding $4 billion, the Insurance Council of Australia has called upon the Australian government to do more to protect Australian people and businesses against extreme weather events.”

Regulation

2021 was marked, Sparke Helmore detailed, by the introduction of a new Insurance Code of Practice and sweeping regulatory reforms for Australian insurers, including the introduction of a deferred sales model, anti-hawking, breach reporting and unfair contract terms.

“The final raft of changes released in late 2021 comprised new targeted and principles-based design and distribution obligations for product issuers, product intervention powers for the regulator, and new licensing requirements introduced for claims handlers (effective January 2022),” the firm wrote.

“2022 promises a plethora of new reforms including: a new Insurance Brokers Code of Practice (effective November 2022); a prudential guide on climate change financial risks; a prudential standard on remuneration practices (effective January 2023); and new financial contingency planning and resolution planning standards for insurers (currently under consultation).”

How lawyers can respond

In conversation with Lawyers Weekly, Mr Cameron said that Australian legal practitioners in the insurance space will need to support clients in respect of the aforementioned three key risks.

“Clients responding to new regulatory reform will need assistance understanding their new legal obligations, whilst driving cultural change within their organisations. Insurers may need assistance navigating exclusion clauses in respect of recent flood claims, whilst balancing both legal and reputational considerations. In the class actions space, litigation funders will need to be kept abreast of key changes,” he advised.