Where is the Professional Indemnity Insurance Market Heading?

May 2009 

Market Update - June 2009

Reviewing the PI market in last August we commented that we continued to experience a “soft” market that commenced in 2004. Come 2009 we are yet to see the end of this soft cycle but in our view the writing is on the wall for the market to turn.

Industry participants continue the “talk” about the market hardening, however fierce competition in the professional indemnity insurance market continues.

A soft market is characterised by an increased number of participants, more accessible insurance, reduced premiums and broader cover generally available.

These conditions continue to prevail with the number of insurers and underwriting agencies in the Australian professional indemnity insurance market now in excess of 40 representing a peak for this market cycle.

Such a high number of participants ensure fierce competition; we believe it will not be until the number of participants begins to decline that the soft cycle will have ended.

A review of the internal and external factors that influence the market cycle indicates to us that if we are not at the bottom of the market we must be somewhere near it. These factors include:

  • Declining or negative investment income on reserves held by insurers;
  • Depletion of reserves that have been released by insurers in recent years to ”prop up” financial results;
  • Increased litigation and therefore claims activity due to depressed financial market conditions;
  • A period of significant weather related losses;
  • Increased reports of lower profits and even losses by international re-insurers;
  • Reduced profitability of the insurance industry generally;

The final point above is best illustrated by examining the aggregated results for the Australian insurance market. The combined ratio (Losses divided by Premium) of all classes of insurance has now breached the 100% barrier which means that insurers are making an underwriting loss and are therefore dependent upon a combination of investment income or release of loss reserves in order to be able to report profits to shareholders.

With neither of these factors present in recent times we believe those insurers currently experiencing the above underwriting losses will have no choice but to increase premiums. Despite this we are yet to see a hardening in the professional indemnity insurance market for engineers and construction professions. Whilst market feedback indicates rate increases and a general hardening of market conditions for certain traditionally difficult to place professions as well as rate increases for related Directors and Officers Liability insurance products we are yet to see this.

In summary, taking the above factors into consideration we believe that we must be somewhere near the bottom of the market cycle however it is not until we see a reduction in market capacity that we expect the flow on effect of hardening rates. Whilst picking the bottom is a difficult task we believe the strength of the above indicators is such that the market will begin to demonstrably harden within the next two years.

For further information please call one of our specialist consultants on 1800 077 933



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