Q2 2024: Insurance Market Trends
- Looming insolvency pressures are casting a long shadow over Australian businesses this quarter, with current levels far above those seen in previous years. Recent data from Creditor Watch highlights a troubling trend: an increase of over 22% in companies entering external administration compared to this same time last year. Looking ahead, projections indicate that the number of companies entering external administration could surpass 10,000 by June 2024, a threshold not seen since the 2012–2013 financial year. The construction industry has been particularly hard hit, constituting a significant 27.7% of all insolvencies, as reported by ASIC in April 2024. Following closely behind are the accommodation and food services sectors, which accounted for 15.2% of company failures. These statistics underscore a sectoral vulnerability exacerbated by persistent economic pressures. Moreover, specific types of insolvency procedures have seen dramatic spikes. Restructuring appointments have soared by an alarming 294.6%, while court liquidations have increased by 218.8% compared to the corresponding period last year. Such figures suggest deep-seated financial distress across the corporate landscape.Several factors contribute to this worrying trend. For example, the Australian Taxation Office’s vigorous efforts to recover a staggering $50 billion in outstanding debts, alongside intensified debt collection activities by major banks, have respectively compounded pressures across the economy.Amidst these turbulent conditions and as we navigate the tumultuous waters of the current economy, the imperative for proactive financial management and robust risk mitigation strategies becomes ever more urgent.
One such strategy we are encouraging our clients to consider, is trade credit insurance, a critical safeguard against the potential domino effect of insolvency. By replacing lost cash flow and protecting profits, this insurance enables policyholders to maintain resilience in the face of financial adversity and is one tool in sustaining business continuity amidst the fallout from economic instability.
- Swiss RE’s Resilience Index tracks an economy’s ability to endure economic shocks. Amidst global economic uncertainty reaching heightened levels in recent months, unforeseeable risks are increasingly impacting economies at both macro and micro scales more severely than in previous years. These insurance resilience indices assess how insurance helps uphold financial stability for households and businesses by managing risks across life, health, property and business. Swiss RE also track what has been coined the ‘Protection Gap’ which refers to the uninsured or inadequately protected portion of resources required to fully mitigate risks i.e. put simply, the difference between total economic losses incurred and total insurance losses paid across the world. Australia’s 10 year average protection gap is 33%, being the difference between the $37B (USD) economic losses incurred over the last 10 years and the $25B (USD) insured losses paid. In light of the evolving economic challenges and ongoing uncertainty, it is crucial to delve into the factors that influence risk absorption, the pivotal role of insurance in mitigating these risks, and the proactive steps we can undertake to bolster resilience across both business and personal exposures.However, as the Swiss Re resilience index and protection gap proves, coverage limitations persist, leaving significant portions of populations exposed to significant interruptions and at risk of their prosperity and longevity being undermined by ineffective risk-management.
- The recent CrowdStrike and Microsoft outage, is yet another example of how such unforeseen risks can present themselves. It was only last Friday, July 19th that the servers of millions of individuals and businesses across the world were impacted by a global IT outage, triggered by a flawed software update from (ironically) the international cyber-security technology company CrowdStrike. The malfunctioning update to the CrowdStrike platform, which was intended for servers running the Microsoft operating system, affected approximately 8.5 million devices worldwide. In their statement, CrowdStrike acknowledged the seriousness of the situation recognizing “the profound impact this has had on everyone involved.” Further noting that they “deeply appreciate the efforts of their customers, partners, and their IT teams, who are working around the clock to address the situation” and apologizing for the disruption caused, reasserted that they “are committed to restoring every affected system as swiftly as possible.” The repercussions of the breach were far-reaching, disrupting multiple sectors in different ways. Flights were grounded, health services experienced significant disruptions, and payment systems were rendered inoperative, underscoring the widespread impact of these kind of cyber incidents and the interdependence we have on the core programs and systems we use.In Australia, Andrew McKellar, CEO of the Australian Chamber of Commerce and Industry, highlighted that numerous businesses had experienced substantial productivity losses and missed sales/business interruption effects due to the recent incident. He called on the insurance sector (which has already been identified as the primary source of response) to expedite claim payments, emphasizing the urgent need for swift financial support to help affected businesses recover and mitigate the impact of these disruptions.It is too early to tell how the insurance industry will respond to the broader fall-out but with CrowdStrike refusing to comment when asked about its obligations to pay damages or refunds to clients, it is clear that this is yet another example of the imperative need for business to pursue cyber insurance solutions – to mitigate exposures to events such as these.
Please reach out to our team should you have any interest in discussing how a Cyber Insurance Policy may respond in these types of scenarios, for example; how Cyber Business Interruption cover is triggered and how the extensions for Widespread Cyber Events offered by certain carriers can have crucial indemnity implications.
We hope this review has served as an insightful resource and we encourage you to stay informed to adapt effectively to the evolving challenges and opportunities impacting the insurance sector.
As always, our team is more than happy to answer any questions on these topics and/or explore any further factors you may be interested in understanding beyond the themes addressed above.
You can subscribe to this update on our website, and also stay in touch with our Embrace Risk Blog – as we will be continuing to share more regular content with you there over the coming weeks and months.
References:
https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-077mr-asic-insolvency-data-shows-increase-in-companies-failing/
https://www.swissre.com/institute/research/sigma-research/natural-catastrophe-insurance-global-resilience-index-2024.html
(https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-077mr-asic-insolvency-data-shows-increase-in-companies-failing/)
https://www.swissre.com/risk-knowledge/mitigating-climate-risk/natcat-protection-gap-infographic.html#/country/Australia/open
https://www.afr.com/politics/federal/ato-ramps-up-warnings-on-50b-in-tax-debts-20240404-p5fhbu
https://www.afr.com/technology/crowdstrike-failure-raises-billion-dollar-compensation-question-20240721-p5jvao |