A profitability recovery in professional indemnity and directors’ and officers’ (D&O) insurance could be derailed by headwinds fanned by economic instability, an increase in competition and regulatory shifts, an industry conference has heard.

Finity Consulting Principal Susie Amos says the overall class has likely reached insurer profitability targets but the achievement could be short lived, and despite significant annual year-on-year rates, there’s little room for declines.

The situation is finely balanced and a 5% rate reduction could put pressure on achieving insurer targets and a 10% decline could be loss-making, she says.

Ms Amos says pressure could come from additional capacity, although a more targeted approach and a greater sophistication in pricing could point to market discipline.

“That’s a really positive sign, but definitely some new entrants means that the competition is going to increase, and it will be harder to keep the rates at the level that are needed,” she told the Australasian Professional Indemnity Group (APIG) conference in Sydney yesterday.

Ms Amos says from a claims perspective, there’s more economic instability, inflation is escalating, government supports that curbed insolvencies during the pandemic have ended and property prices may ease.

“We know this class is really driven by the economic status, so an economic downturn would lead to more claims. We have seen historically how correlated it is to that environment,” she said.

In D&O, which is slightly ahead of professional indemnity in meeting the targets, the change of federal government has shifted the regulatory landscape, improving the outlook for litigation funders, including for securities class actions centred on market disclosure.

Ms Amos says environmental, social and governance (ESG) issues and cyber are also an area where more claims are coming through, adding to possible pressure in the class.

Insurers will benefit from the improving investments environment amid the changing economic environment, but they also face higher costs in areas such as reinsurance.

A separate APIG conference panel, which discussed the post covid market, pointed to an increased focus on risk selection, and contrasts with previous cycles where rising price have been followed by capacity influxes and steep declines.

“The nuance to me is that underwriters have so much more data and I think there is a much more sophisticated approach to segmenting the portfolios and risks,” WTW Professional and Financial Lines Leader Jill Stewart said.

Ms Stewart says there’s a division, with some clients seeing a lot of interest, more capacity and a shift on pricing, while others continue to face difficulty, whether in financial lines or more broadly across the market.

ProRisk Executive Director Hamish McDonald Nye says the underwriting agency, which mainly operates in the SME market, has not seen rate increases across the board in the past few years, while there has been a focus on risk selection.

“I suspect that we are not going to see a softening of rates in the SME market. If anything, I think that it will actually tick up a little bit in the next few years,” he said.