The Commonwealth Treasury


COMPENSATION FOR LOSS IN THE FINANCIAL SERVICES SECTOR ISSUES AND OPTIONS September 2002

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Attachment E: The current professional indemnity insurance market

The Australian Competition and Consumer Commission (ACCC) has issued an Insurance Industry Market Pricing Review (March 2002).107 This report provides valuable information on the current state of the general insurance market in Australia. The Government has asked the ACCC to continue to update its report and provide analysis of the competitiveness of the public liability and professional indemnity sectors of the market.

The ACCC noted in its report that the general insurance industry as a whole had had a low return on equity over the past nine years. Recent performance and outlook for professional indemnity insurance was for a return of less than minus 5 per cent.

The significant increase in premiums during the year to March 2002 was seen as being related to the shift by insurers from establishing targets for business growth (as measured by premium volume) to setting targets for return on equity. It also related to the realisation that recent low returns on capital had occurred, in the case of professional indemnity insurance through a combination of:

In addition:

The ACCC report discusses the cycles and shocks involved in general insurance pricing and concludes that the cause of sudden swings in premium rates is unpredictable and can be expected to continue to occur.

Professional indemnity insurance is one of the smallest classes of insurance, representing 3 per cent of total gross written premiums in Australia and less than 1 per cent of policies written. However, in 2000-01, it accounted for 8 per cent of the outstanding claims liability.

The responses of insurance companies to the questionnaire, which informed the ACCC report, indicate an average increase in premiums of 27 per cent. The reasons quoted were `to achieve profitability' and deterioration in experience.

The report concludes that significant further increases could occur for professional indemnity insurance but the actual increases will depend on how insurers react to a series of relevant issues - for example:

The low premium base enjoyed by policyholders in recent years, in conjunction with the losses incurred in relation to professional indemnity insurance, mean significant percentage increases in premiums by those insurers remaining in this sector of the market.

While this may be seen as part of a natural cycle in the insurance sector, concern has been expressed by segments of the financial services industry as to whether the increases in premiums being experienced reflect a valid assessment of the risk inherent in the particular business.

In an environment where there are fewer insurers offering professional indemnity insurance, the power of individuals and industry associations to negotiate the cover considered suitable for that segment of the financial services industry is reduced and the likelihood of exclusions being imposed by insurers may increase.

107 The ACCC website is www.accc.gov.au.