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09/07/2014
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© Lloyd’s 1© Lloyd’s 1
Christian StanleyPerformance ManagementDirectorateLloyd’s
Professional Indemnity
Professional Indemnity Forum Conference
Oxford University
8th-10th July 2014
© Lloyd’s 2
►Dynamics of the PI tail
►The PI (non-US) Market in Lloyd’s:
– Components
– Performance
– Pricing
– Outlook
Agenda
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© Lloyd’s 3
‘Examining influencing factors driving the
performance of the PI class’
‘Examining influencing factors driving the
performance of the PI class’
Dynamics of a long tail classDynamics of a long tail class
© Lloyd’s 4
The luxury of positive cash flowThe luxury of positive cash flow
-
PI is characterized by a delay between the year in which cover is
afforded and the year the claim is paid.
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© Lloyd’s 5
The Float… it’s Other Peoples MoneyThe Float… it’s Other Peoples Money
- Float arises because premiums
are prepaid and there is an
interval, often over years, before
losses are paid.
- It doesn’t belong to us, we
temporarily hold it.
- What other form of financing is
better than this: -No collateral
-No interest
-No repayment
- Then we invest it88
OPM8. It’s Addictive
© Lloyd’s 6
And didn’t we all get used to that
rising investment environment………
And didn’t we all get used to that
rising investment environment………
Well it was the
90’s man !
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© Lloyd’s 7
But hold on8 ‘A cost free Float is not an outcome to be expected’
‘In 37 of the 45 years ending in 2011 the industry premiums have been
inadequate to cover claims.’
‘Saved by the Bull’‘Saved by the Bull’
© Lloyd’s 8
‘One comes to rely on the support!‘One comes to rely on the support!
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© Lloyd’s 9
© Lloyd’s 10
Inflation8... is always and everywhere a monetary phenomenon
Milton Friedman (1970)
Inflation8... is always and everywhere a monetary phenomenon
Milton Friedman (1970)
- Monetary
- Superimposed- Legal
- Social
- Medical Cost
- Emerging Risk
5%pa ?
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© Lloyd’s 11
Gearing effect of inflation on an excess layerGearing effect of inflation on an excess layer
- In the base case a £550,000 claim gives the excess layer a £50,000 loss.
- After a 5% claim inflation the loss to the excess layer is £77,500……A 55% increase !
- Just imagine how this scenario would ramp up over several years of compounded inflation !
© Lloyd’s 12
Poor investment yields……Poor investment yields……
‘Legacy’ bond
portfolios deliver
much higher yields
than will be
available when
they mature and
are reinvested
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© Lloyd’s 13
A 100 Combined Ratio Isn’t What It Once Was….. Investment
Impact on ROEs
A 100 Combined Ratio Isn’t What It Once Was….. Investment
Impact on ROEs
© Lloyd’s 14
-Crashed investment yields
-Devastating compounded, superimposed inflation
Worst of Both WorldsWorst of Both Worlds
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© Lloyd’s 15
Increased Claims & Reserve DeteriorationIncreased Claims & Reserve Deterioration
►Economic cycle related losses
►Systemic Claims
►Legislative and Regulatory changes
“You only find out who’s swimming
naked when the tide goes out”Warren Buffett
© Lloyd’s 16
Correlation to the Economic Cycle ?Correlation to the Economic Cycle ?
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© Lloyd’s 17
The Walking DeadThe Walking Dead
Insolvent insurers don't run out of cash until long after they have run out of net worth.
In fact, these “Walking Dead" often redouble their efforts to write business,
accepting almost any price or risk, simply to keep the cash flowing in.
© Lloyd’s 18
So, how does one survive such an onslaught…
Run away from the tail ?
So, how does one survive such an onslaught…
Run away from the tail ?
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© Lloyd’s 19
Familiar Characteristics ?Familiar Characteristics ?
© Lloyd’s 20
Casualty Laden GraveyardCasualty Laden Graveyard
Some standouts that we can
all recall …..
- HIH 2001
- Independent 2001
- Quinn 2010
- Lemma 2012
- Balva 2013
Some standouts that we can
all recall …..
- HIH 2001
- Independent 2001
- Quinn 2010
- Lemma 2012
- Balva 2013
Main Causes of Insolvency: 34% Insufficient Reserves
20% Rapid Growth & Under Pricing
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© Lloyd’s 21
The PI (non-US) Market in Lloyd’sThe PI (non-US) Market in Lloyd’s
© Lloyd’s 22
Components Components
- Size
- Profession
- Placement Method
- Territory
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© Lloyd’s 23
Size Size
80% European
15% Australia / Canada
5% Other
© Lloyd’s 24
Profession Profession
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© Lloyd’s 25
Placement Method Placement Method
© Lloyd’s 26
Territory Territory
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© Lloyd’s 27
Performance Performance
- The Underwriting Cycle
- Solicitors
- Accountants
- Architects & Engineers
- Miscellaneous
© Lloyd’s 28
The PI Underwriting Cycle The PI Underwriting Cycle
-
200
400
600
800
1,000
1,200
1,400
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ult
imate
Pre
miu
m £
m
Ne
t U
ltim
ate
Lo
ss R
ati
o %
Net Net Written Premium £m Gross Net Written Premium £m
As at 24 Months Net ULR Latest Net ULR
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© Lloyd’s 29
Solicitors Solicitors
© Lloyd’s 30
► International profile dominated by UK and Commonwealth territories
► Offshore Corporate Service Providers
► Significant participation on Top 100 firms
► < 10 ptnr firms not widely written
► Increased recession related claims :
► Law firm insolvencies
► Consolidation of Firms
► Alternative Business Structures (ABS)
► Increased interest in UK Solicitors as a result of abolition of ARP and
common renewal date (136 firms could not obtain cover)
Solicitors Solicitors
- Fraud
- Commercial transactions
- Conveyancing
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© Lloyd’s 31
Accountants Accountants
© Lloyd’s 32
Accountants Accountants
Source RPC LLP
- 2009 more than the past
5 years combined
- 2002 post dot com bubble
and Enron/Worldcom etc..
there were 37
Increase in recession
claims:
- Failure to spot
fraud
- Over valuation of
assets
- Tax advice
- Corporate
insolvencies
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© Lloyd’s 33
Architects & Engineers Architects & Engineers
0
20
40
60
80
100
120
140
160
20%
40%
60%
80%
100%
120%
140%
160%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Architects & Engineers Performance
GNP (£k) GNULR
© Lloyd’s 34
Architects & Engineers Architects & Engineers
►Recession Related Claims:
- Project loss of funding
- Counter claims following fee disputes
- Cutting corners to save costs
- Delays and increase in costs are no longer masked
by rising property values
- Reduction in new projects gives opportunity to
pursue negligence claims on past works
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© Lloyd’s 35
Miscellaneous PI Miscellaneous PI
0
50
100
150
200
250
300
20%
40%
60%
80%
100%
120%
140%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Miscellaneous Performance
GNP (£k) GNULR
© Lloyd’s 36
Miscellaneous PI Miscellaneous PI
► Surveyors & Valuers
► IFA’s
► Insurance Brokers
► Technology and Cyber Liability
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© Lloyd’s 37
Surveyors and ValuersSurveyors and Valuers
- Negligent over
valuation of
commercial and
residential property
- Underestimation of
cost of putting a
development project
on hold
- Increased fraud
Source RPC LLP
© Lloyd’s 38
Financial AdvisorsFinancial Advisors
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© Lloyd’s 39
Pricing Pricing
- Only 20% fall from the
peak?
- Churn not recorded
- Rate Increases:
- Surveyors
- IFA’s
- <10 ptnr. Solicitors
© Lloyd’s 40
Eat Like Chickens, S**t like Elephants
Pricing Adequacy - Will the margin cover the downside? Pricing Adequacy - Will the margin cover the downside?
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© Lloyd’s 41
The Outlook for PI The Outlook for PI
© Lloyd’s 42
Is there a Challenge ahead for the PI market ? Is there a Challenge ahead for the PI market ?
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© Lloyd’s 43
Yes…. Plenty Yes…. Plenty
- Interest rate hike
- Class Actions
- Third Party litigation funding
- Prolonged soft market
- Increased Regulatory Scrutiny
- Recession
- More mis-selling Scandals
- Reserve strengthening
© Lloyd’s 44
Forward Guidance Forward Guidance
- Stronger economic growth
- Increased professionals subject to
compulsory PI insurance
- Six year statutes continue to expire
- Increased regulation is improving
professionals behaviour
- Higher standards of risk management
- Continued product evolution
E.G. IT / Media /Cyber
Despite the challenges there is#.
