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Susie Amos: Welcome, I'm Susie Amos from Finity Consulting.
Today I want to take you through a session called Reading Between the Financial Lines.
Financial lines is a class that's quite volatile, it's notoriously difficult to price, and it's
one that's really impacted by [00:00:30] economic conditions.
So today I'm going to take you through the trends and the challenges of financial lines.
Let's start with the financial lines short story.
Financial lines has a premium pool of $1.6 billion.
Half of that is professional indemnity, and over the last 15 years there's been a fair
bit of growth coming from the London market.
So the Lloyd's market has more than doubled over this time, creating [00:01:00] a fair
bit of competition in the market.
When we look at the loss experience coming through, there's quite a significant loss
ratio that the market has experienced during the Global Financial Crisis.
The economic environment really impacted the losses coming through from this class, but
one thing that's quite unusual is that the reinsurers bore the brunt of most of these
losses, and the local insurers didn't get too much losses out of this, and their net
loss ratio [00:01:30] only ended up being about 40% or 50% during this time.
Since the Global Financial Crisis, there's been a continuing reduction in premium rates,
which is quite surprising considering the significant losses that were impacted during
the Global Financial Crisis.
So now let's dig a bit deeper into financial lines and have a look at it at a class of
business level.
Digging a bit deeper by class of business, professional [00:02:00] indemnity is the main
part of financial lines, it's worth about $700 million of premium.
Directors and officers is worth about $300 million of premium and management liability
has been emerging quite strongly and growing over the last 10 years, and it's now worth
about $100 million worth of premium.
In terms of the loss experience, each of these classes are emerging quite differently.
So professional indemnity was impacted during the GFC, but since this time it's been emerging
quite profitably and [00:02:30] sitting at about a 55% loss ratio at a market level.
When we look at D&O though, a very different picture.
Class action environment and the losses emerging and hitting insurers is really driving quite
poor loss experience for directors and officers class and impacting the insurers.
We're seeing about a 100% loss ratio coming through for this class, and this is something
that is really being looked at closely by insurers, and I expect to see some changes
happening going forward [00:03:00] to try and address these issues.
Management liability, it's a new class but now it's got to a point where it's become
more mature, and we've seen deteriorating loss experience come from this class, reaching
about a 70% loss ratio at the moment.
All of these experiences combined has meant that the market has started to raise premium
rates and started to harden a bit.
So we'll hopefully see this continue, and try and recoup some of the losses from [00:03:30]
these classes.
What I want to do now is move forward and just delve into this class action environment
that we're in now, and talk a bit more about how it's impacting financial lines.
Class actions have really been impacting the directors and officers class from a lost point
of view.
Insurers are seeing a number of claims coming through from this area, and this is driven
from a well-established regulatory environment for [00:04:00] class actions, and it's also
driven from the lawyers and litigation funders seeing it as a profitable area to make money.
From the litigation funders, they enable these class actions to get up and running and they
get about 20% to 40% of the settlement amount.
Lawyers, they've had reduced business from tort reform and now they're seeing it as an
area to make money, so class actions are certainly up and running and one thing that we would
have expected is that they would reduce since the Global [00:04:30] Financial Crisis, but
actually they continue to increase and continue to broaden in type and in number.
Over the last number of years, I've started collecting from publicly available information,
the numbers and the types of class actions that have started to come through the Australian
environment.
There's a chart that you'll see on your screen there and what it shows is quite a dramatic
increase in the number of class actions coming through, and a broadening of the type of actions
that are coming through.
On average [00:05:00] we see about 40 class actions coming through per annum and half
of these would be relating to financial security class actions, the other half relating to
consumer, public interest, and even natural disasters are getting class-actions held against
them for negligence through that particular event.
One thing we've started to see with the deterioration in this class, insurers are starting to think
about a different way of underwriting and pricing [00:05:30] for D&O.
They're starting to think about class actions as a catastrophe like your natural perils
type of catastrophe, and putting that into the pricing framework.
This is something that you'd expect to see coming through in the future.
One of the things I like to think about is the future for the financial lines environment,
and what it's going to look like in three to five years time.
What we've seen in the past is quite a bit of an increase in competition, particularly
coming from underwriting agencies.
Now I count [00:06:00] about 100 underwriting agencies particularly focused on financial
lines.
There's a lot more that cover other classes of business.
This has really increased the competition for financial lines in the commercial insurance
environment.
But going forward, we might see quite a change in the distribution of financial lines.
Currently about 80% is distributed through brokers and 4% online.
The rest of it's distributed [00:06:30] through underwriting agencies, but with an economy
and a business environment where the majority of businesses are quite small and don't need
sophisticated advice, what we'd expect to see is an increase in the distribution through
an online channel.
We're already seeing insurers and other underwriting agencies targeting this area, and with the
technology and the online connectivity, and the comfortableness people have with purchasing
things online, [00:07:00] this is where I'd expect there to be a growth over the next
three to five years.
Cyber insurance is a hot topic and it's an area where financial lines underwriters have
started to increase their product offering and offer cyber insurance, and also increase
their growth potential as well.
What we're seeing with cyber insurance is that it's a product that includes both first
and third party.
It's a new and evolving product [00:07:30] in Australia, so at the moment there's quite
a varied range of products out there, and also there's a fairly low premium pool.
What we'd expect is an increase, a substantial increase in premium and growth over the next
three to five years, and if we look at the UK and the US, we could see a similar level
of growth come through in Australia.
Mandatory reporting will be coming in early in 2018, and that's something I think will
really trigger [00:08:00] the growth of cyber insurance in Australia.
Cyber insurance is something that it's a difficult area to price and underwrite, because there's
limited data, limited information, and it's such a new product in Australia.
But this is an opportunity for underwriters and actuaries to come together and really
use a judgemental approach, use lots of different pieces of information to try and come up with
a view of how to price and underwrite for this new insurance product.
So in conclusion, financial [00:08:30] lines is a class that's had quite a volatile history,
and going forward we expect to see new challenges but also new opportunities, given the market
starting to harden, given new products that are coming through.
But all in all it's an area that's really linked to the economy, and really varied risk
drivers from different components of the market.
I hope you've enjoyed this session today and got something out of it.
Thank you for listening.