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Published on 10 January 2022

In this chapter of our Annual Insurance Review 2022, we look at the main developments in 2021 and expected issues in 2022 for Australia.

A look back at 2021

COVID-19 continued to cause disruption in Australia during 2021. While not subject to the lockdowns that Europe and other jurisdictions faced in the first half of the year, the level of normality that had been achieved in the early months came to an end in the middle of the year following significant outbreaks in New South Wales, Victoria and ACT (and smaller outbreaks in other states and territories) leading to the closure of internal boarders, limitations on international arrivals and lockdowns.

COVID-19 continued to place the business interruption (BI) policies of many insurers under the microscope as test cases proceeded through the Courts both locally and around the globe. A key Australian decision in Star Entertainment Group Limited & Ors v Chubb Insurance Australia Ltd & Ors [2021] FCA 907 addresses two pivotal questions concerning: what constitutes 'loss resulting from or caused by any lawfully constituted authority' and whether COVID-19 constitutes a 'catastrophe'. In this instance, the Federal Court ruled that insurance companies were not required to indemnify Star Entertainment for losses incurred as a result of government imposed restrictions. 

The class action space in Australia is experiencing high levels of volatility associated with a series of targeted regulatory changes by the Federal Government to regulate litigation funders, increase settlement return thresholds and reduce funder commissions. Coordinated changes have also been made to the Corporations Act that will make it more difficult for class action plaintiffs to succeed against companies for breaches of Australia's continuous disclosure rules.

The new and foreshadowed regulatory changes have seen a reduction in the overall number of class actions being commenced but a noticeably sharp increase in class actions commenced without a litigation funder, including in the Supreme Court of Victoria where contingency fees were introduced in 2020.

The fall out of the combustible cladding crisis continued to impact the construction sector and its insurers. In April, the Court of Appeal of the Supreme Court of Victoria gave judgment in various appeals brought from the orders relating to the Lacrosse Apartments - the first cladding matter to go through the Australia Courts - endorsing the trial judgement that found the building surveyor, architect and fire engineer liable 97% of the damages of the owners losses. The outcome of this appeal, which will likely be subject to an appeal to the High Court, has provided guidance for insurers as they continue to manage claims and notifications. 

Cyber-attacks have continued to make news headlines in 2021, with long lockdowns playing into the hands of threat actors who take advantage of the rapid digital transformation which has been accelerated by the events of the last two years. The Australian Cyber Security Centre (ACSC) observed that to 30 June 2021, there was an increase of nearly 13% from the previous year in reported cyber-attacks resulting in losses of more than $33 billion with the insurers reporting a corresponding increase in notifications and claims. 

Australia is not alone in tackling cyber-attacks comprising ransomware, business email compromise, phishing, and data breaches and in 2021 there have been some notable cyber events involving manufacturers, health care providers, entertainment brands, technology providers and government organisations impacting ability to carry out core operations. 

In the regulatory space, 2021 saw the insurance recommendations of the Financial Services Royal Commission implemented by the Australian Government.

Insurers started the year preparing for the introduction of the new unfair contract terms regime. Long established in other financial areas (and in particular consumer credit), there were a number of instances where insurers struggled conceptually to apply some of the thinking behind unfair contracts as it has developed in consumer finance, and we await any test cases or announcements of enforcement action.

In addition, there were new design and distribution obligations, the end of the exemption of claims handling and settlement from the regulated financial services regime, and a new duty to take reasonable care to replace the former duty of disclosure for consumer insurance only. 
The courts also found some teeth in the previously underutilised parts of the Insurance Contracts Act which codify the duty of good faith - and have issued some interesting declarations at the suit of the Australian Securities and Investment Commission to the effect that insurers had engaged in inappropriate conduct.

Looking forward to 2022

The shadow thrown by COVID is likely to remain despite the opening of internal and external borders and the national vaccination rates hitting 90%. A number of major BI claims remain on foot and even as we head into December, there are reports of others being initiated as plaintiff firms gather class action members. There has also been much talk of a public inquiry or Royal Commission into the handling of COVID by Federal, State and Territory Governments, which will be watched closely by insurers in anticipation of claims or class actions that could potentially result. 

Following the slew of regulatory changes implemented in 2021, 2022 will be the year in which insurers learns how to work with the new regulatory regime, and for ASIC to initiate some high profile licence condition or enforcement actions to test the new regime. 

There is expected to be continuing levels of uncertainty for the future of the Australian class action market until the next Federal election in the first half of 2022. Should the existing government be returned than the regulatory environment is expected to further intensify. If there is a change in government then it is likely the new regulatory environment will be substantially weakened with a likely return to previous class action and litigation funder activity levels. 

Cyber-attacks will continue to be one of the top risks for organsiations and cyber insurance demand will continue to increase. 2022 will see the introduction of a regulatory framework by the Australian Government around this. 

The Security Legislation Amendment (Critical Infrastructure) Bill 2020, which has been passed, will be split into two so that government intervention into cyber security incident responses can be progressed urgently. The bill seeks to enhance the regulatory framework to address serious cyber security incidents to infrastructure which include gas pipe lines, banking institutions, electricity assets, and enabling an emergency hatch for government intervention into cyber security incident responses.   

Under the Ransomware Payments Bill 2021, entities intending to make a ransom payment (excluding those with an annual turnover less than AUD3million) will be required to notify the ACSC of key details giving the ACSC clearer oversight into attacker trends and the impact on the economy.

The sector as a whole continues to face the challenges of a hardening market and the financial impacts of COVID, erratic climate events and fierce competition keeping downward pressure on pricing. There are rumours of M&A activity in the sector within 2022 which could see some consolidation in the market. Insurers will continue to look at innovative business models and investment in InsurTech to control costs, drive efficiency, and maintain market share. 

Written by Jonathan Newby.

Download our full Annual Insurance Review 2022 for more insights.