Current Professional Indemnity (PI) Market, Expectation and Profitability of Pacific Indemnity Portfolio

September 25, 2020

First, we would like to thank you our partner brokers for your support.

We understand that there has been market concerns in the past 18 months with the increase in PI rates particularly in construction professionals and financial services.  There has been a shortage or lack of available capacity for some professions and in some cases like building surveyors, market capacity has evaporated. As you may be aware the shift in the market is due to:

  • an increase in loss experience
  • reduced capacity from Lloyd’s and other markets
  • overall lack of profitability of these classes.

Consider the following:

  • The industry net profit after tax of insurers to June 2020 reduced from $3.5B to $1B or a return on asset from 12.4% to 3.5% (APRA GI Quarterly performance 08/2020).
  • Finity estimated that the combined operating ratio in PI in FY19 was 105% compared to insurers’ target COR of 85%. To reach the target COR, rates must increase by 24% across the board.
  • Lloyd’s capacity continues to be constricted and if available it is for a higher rate.
  • In the latest APRA National Claims and Policy Databases report for calendar year 2018, there was a strengthening in prior years claims reserves of over $1B which is substantial for a class of business with annual premium of $2.5B. Though not all related to PI, we are aware of large increases in PI claims reserves further exacerbating PI claims result.

In IAG’s recent investor report, it stated that there was an “increased large loss experience in the Pacific Indemnity agency business”. While the statement is factual, it does not provide the complete picture that our portfolio, overall, has remained profitable for IAG for FY20 and that large claims are expected to happen from time to time in long tail business. When severity claims do occur, however, the impact on the portfolio from these claims highlights the value of a balanced portfolio – which is the essence of insurance.

We also wish to clarify that our portfolio did not suffer from the need for strengthening of prior years’ claims reserves, in fact we had releases from prior years’ claim reserve in FY20.  As supported by Brad Robson, Executive Manager Broker and Agency, he stated:

“Pacific Indemnity has been a consistent profitable performer for IAG Agencies.  It has remained focused in providing a profitable portfolio. “

Since we started almost five years ago, one of our objectives in Pacific Indemnity has been to have a balanced portfolio that provides sustainable profit for our insurers.  If we are going to be a successful and a long-term player in our chosen class of business, then this is an important goal that we must achieve.

Since our inception we have achieved:

  • Profitable underwriting results every year for our insurers particularly for IAG and more recently Zurich as 25% co-insurer in our PI co-insurance program
  • Rolling 12 months gross written premium of $52M excluding standalone general liability which we write on separate binder
  • Increase in the number of our partner brokers with deeper relationships and engagement.

Achieving a favourable loss experience allows us to provide you our partner brokers with ongoing stable capacity for your clients for the years ahead.  We believe we have accomplished this goal particularly in the last two years as market rates have substantially increased.  This is only possible when we achieve a balanced portfolio – a combination of small and mid-sized risks of low to medium exposure and not just highly exposed risks.

So, what do we expect to happen in the PI market in the next 12 months?

There are a number of challenges facing PI insurers that will affect loss experience and thereby pricing, such as:

  • Economic impact following the lockdowns. Historically, PI claims increase following economic downturn.  Example of such claims are those arising from the declining value of properties and other assets.
  • Defective buildings
  • Availability of finance for business
  • Potential COVID-19 claims on nursing homes, hospitals, and health providers.
  • Potential claims from the Aged Care Royal Commission and remaining actions and outcomes of the Hayne Royal Commission.

PI premium rates are expected to increase from 10-20% and higher for complex or highly exposed risks or those with substantial claims.

We in Pacific Indemnity expect our premium rates over the coming year to be:

  • stable for miscellaneous PI and ICT; however
  • for small to medium construction professionals, accountants, and financial planning there will be a moderate increase; and
  • for real estate, D&C and large construction professionals there will be a more significant increase in consequence of loss experience.

For you as partner brokers we are willing to work out an alternative solution, particularly in these challenging times.

Finally, we would like to thank you for your support.  Providing us a balanced portfolio is critical to the profitability of our portfolio overall and our ability to provide stable rates and capacity to your clients now and in the future.

Best regards,

Jun Acance

Managing Director

Pacific Indemnity Underwriting Solutions

 

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