Double-digit rate rises are expected this financial year for directors’ and officers’ (D&O) and professional indemnity (PI) but it won’t be enough to restore profitability to the troubled lines, according to Finity.

In its Optima report the actuarial and analytics consultancy predicts a 10-20% premium increase in D&O and 10-15% for PI, which is less than the minimum needed to stem the losses.

“To get back to target profitability under the current environment, PI rate increases of 15-20% and D&O rate increases of 30-40% are required,” Finity says.

The PI line is currently running at a combined operating ratio of 105% on an underlying basis and D&O is on 120%.

Finity sees possibly more downward pressure coming the way of the overall financial lines segment.

“Financial lines’ temperature is still hot, with THE 2018 calendar year being the highest-ever year of class action filings and regulatory tightening continuing,” Finity says.

“It is likely that further deterioration is yet to come, particularly in respect of the financial services royal commission claims which will take a number of years to emerge and mature.

“However, there are some early signs that the class action landscape may have reached a turning point, with lower class action numbers in the first six months of [this year]. Time will tell how this story plays out.”

The industry will probably achieve an overall insurance margin of 7% in the current financial year, which would be weaker than the 9% it reported in 2018/19. A return on equity of 10% is on the cards. Again, this would be slower than the 13% the industry made last financial year.

But it is not all that bad considering the prevailing economic conditions where the central bank has lowered interest rates to record lows in a bid to ramp up growth.

“While return on equity has come down, one has to consider that interest rates have come down and so has the cost of capital,” Finity Principal Andy Cohen told insuranceNEWS.com.au.

“So, a lower return might be acceptable given interest rates are so low. Perhaps that could be considered to be on target in today’s low interest rate environment. So, it’s not a bad outcome.”

On the regulatory front, Finity has included a 0.5% expense ratio or about $200 million in costs that the industry can expect to incur as it addresses new requirements.

“There are a lot of regulatory developments that the industry is having to deal with on multiple fronts,” Mr Cohen said.

“That is going to cost extra money.”