Do insurers need to change their litigation models?

He said claims costs are still escalating and insurers must develop new strategies that facilitate early settlement and not “extensive use of external law firms” that contribute to “major claims inflation.”

However, after years of increasing numbers of class actions and extreme premium increases, things are finally looking better in the D&O insurance space.

Read next: Australian insurers under pressure to counter claims inflation

“2017 and 2018 were probably two of the peak years in terms of the volume of securities class actions in Australia. In both of those years there were 24 class actions,” Henry Clark, head of professional and executive risks for Honan Insurance, told Insurance Business recently.

2019 was almost as bad but the last two years has seen a big drop. There were only six in 2021, said Clark.

Insurance companies say the changes to the continuous disclosure laws may have helped pull this number down, but it’s still too early to tell.

“We need to see consecutive years of a slowing down of class actions,” said Clark. “Also, with the changes to the legislation requiring a higher threshold to be able to bring a class action, we hope that will then encourage defendants, like ASX companies, to defend matters.”

Craig Claughton, head of financial and professional services for Marsh, the global brokerage firm, agrees.

“As new class actions come in, what I’m encouraging our clients and directors to do is to actually go ahead and defend them,” said Claughton during an interview with IB late last year.

Claughton co-authored a submission to the Australia Law Reform Commission’s Inquiry into class actions and litigation funders. The submission used empirical data to support the changes that were ultimately made to the continuous disclosure laws.

However, Jones said going to court may not be the best option for companies faced with class actions.

“Settlement is almost always a cheaper option than litigation, particularly when you consider high legal defence costs,” he said.

Read more: Is the D&O insurance crisis finally over?

Jones said plaintiffs and defendants don’t want to see drawn-out legal processes which have been exacerbated by COVID-19-related issues and the impact on judicial delays. He recommended focusing on data to close claims faster.

“Insurers need to examine the characteristics of a claim and deploy new strategies to close quickly before it becomes a runaway claim,” he said.

Jones said insurers should change their current litigation models to facilitate this.

“Insurers need to give their claims departments, or TPAs, the tools, knowledge and training to work towards early claims settlements. This results in greater decision-making by the claims department on how best to manage the claim,” he said.

Jones said these concepts apply not just to D&O/class actions but also across the whole gamut of claims.

“Xceedance uses its data analytics capabilities and state-of-the-art claims systems to support experienced claims teams as they implement strategies to mitigate claims inflation. This is already yielding results for clients in their claims departments or TPA operations,” he said.

“It’s important to avoid unnecessary litigation costs – spending $2 in legal fees to save $1 of the claim settlement is illogical,” added Jones.

Across the insurance industry, Jones said, insurers are facing escalating claims costs and are under pressure to develop strategies to counter the trend.

The COVID-19 pandemic has been a key driver of claims inflation, said Jones, causing delays in the health and justice sectors, as well as major disruption to supply chains.

The surge in new construction and renovation projects, he said, has created material shortages that have resulted in a dramatic rise in construction prices with a knock-on impact to claims costs.

Social inflation has played a role too, said Jones. Litigation awards in the court system have “set the bar high” and fuelled claimants’ expectations about what payouts they are entitled to. Funded litigation has also become prevalent, he said, impacting class actions’ frequency and the size of damages awards.

Clark told IB that the average securities class action costs around $48 million, even though the majority are settled out of court.