MKM Partners' senior partner John Kelly

The professional indemnity (PI) insurance market for advisers will remain tough for another two to three years, but a trickle of new players entering the market is giving hope that a reprieve may be on the cards.

The PI insurance industry has some tough days ahead of it, according to MKM Partners senior partner John Kelly.

In 2019 Kelly’s business partner, Oscar Martinis, predicted the PI insurance market wouldn’t soften until at least 2022 due to regulatory pressure and the market exit of a host of providers including DUAL Australia, Vero and Axis.

18 months later, both Martinis and Kelly agree this dire prediction may have been conservative, with Martinis estimating the timeline for a softening market stretching “another two to three years”.

“We’ve still got another cycle to go,” Martinis says. “Next year we’ll probably see on average another 10 per cent increase in premiums.”

‘Professional lines’

Part of the problem, Martinis says, is that most PI insurers also provide directors and officers (D&O) insurance – a market in poor shape after a heavy period of litigation which has seen dozens of institutions pay court-ordered reparations to clients and fines to regulators.

“Losses across all insurance books continue to be heavy, especially in directors and officers insurance,” Martinis says. “Many class actions that have been launched against the banks and other listed entities run into the tens of millions in costs and settlements.”

D&O and PI insurance usually fall within the same portfolio and are grouped together as ‘professional lines’ by insurers. Losses to that portfolio, regardless of the source, tend to result in policy-wide remediation.

While he notes that PI insurance premiums are largely increasing due to losses “in the PI sector alone”, Kelly says PI insurance will struggle to turn the corner while overall professional line losses mount up.

Exacerbating the issue in the PI insurance market is that claims are coming from all sides, Kelly observes. It’s not just the high profile, “catastrophic” losses that blow out the market and inflate premiums, he says, but the “working losses” stemming from smaller external dispute resolution cases.

“The EDR outcomes are still substantial and can easily erode the annualise premiums, leaving little reserves to cover catastrophe losses,” Kelly explains.

Fragile recovery

Kelly says there is hope for licensees and advisers struggling to keep up with rising premiums.

New entrants to the PI insurance market are just starting to appear, Kelly says, and are in the process of setting up small operations. “We have started to observe new capacity flow into Lloyds,” he says.

This development is only its infancy, he warns, and it will likely take years before any positive impact is felt on premiums.

The glimmer of hope remains a faint one, he says.

“I would suggest this is the beginning of the end of the hard market, yet the end will be a few years away,” he adds. “Any recovery is still fragile and could easily be derailed by losses within market.”

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning. Contact at [email protected]
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