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No relief for loss-making financial lines

The troubled financial lines segment is likely to continue to struggle, dogged mainly by high losses linked to the worsening class action environment, Finity says today in its annual state of the industry assessment.

According to the Optima report, ongoing challenges in professional indemnity (PI) will add to the pressure too.

“Financial lines temperature is still hot, with 2018 calendar year being the highest ever year of class action filings and regulatory tightening continuing,” Finity says.

“It is likely that further deterioration is yet to come, particularly in respect of the Financial Services Royal Commission claims which will take a number of years to emerge and mature.

“However, there are some early signs that the class action landscape may have reached a turning point, with lower class action numbers in the first six months of [this year]. Time will tell how this story plays out.”

Finity is expecting rate hikes of 10-20% for directors’ and officers’ (D&O) and 10-15% for PI this financial year, which are not enough to restore profitability in the two product classes.

The actuarial and analytics consultancy estimates the loss-making PI line is currently running at a combined operating ratio of 105% on underlying basis and D&O is on 120%.

“To get back to target profitability under the current environment, PI rate increases of 15-20% and D&O rate increases of 30-40% are required,” Finity says.

The industry will probably achieve an overall insurance margin of 7% in the current financial year, which would be weaker than the 9% it reported in 2018/19. A return on equity (ROE) of 10% is on the cards. Again, this would be slower than the 13% the industry made last financial year.

But it is not all that bad considering the current state of the economic situation.

“While return on equity has come down, one has to consider that interest rates has come down and so has the cost of capital,” Finity Principal Andy Cohen told today.

“So a lower return might be acceptable given interest rates are so low. Perhaps that could be considered to be on target in today’s low interest rate environment. So it’s not a bad outcome.”

On the regulatory front, Finity has included a 0.5% expense ratio or about $200 million in costs that the industry can expect to incur as it addresses new requirements.

“There are a lot of regulatory developments that the industry is having to deal with on multiple fronts,” Mr Cohen said.

“That is going to cost extra money.”