2022 has been a rollercoaster year for the Australian PI insurance market. As reported in April, the PI market for AFSL holders took a significant turn for the worse when AIG announced its decision to cease providing PI cover to all financial service firms. This announcement hit Australian mortgage funds particularly hard, with Dual Australia also ceasing the underwriting of mortgage funds around the same time. Historically AIG and Dual insured a large portion of Australian mortgage funds and their sudden departure from the market left financial services firms with limited options to secure an alternative insurer.
Where to now? We visited Lloyd’s of London to find out.
With Australian domiciled insurers now showing essentially no appetite to insure mortgage funds and strong demand for commercial insurance solutions from our clients, we braved London’s unseasonable summer heat to meet with Lloyd’s of London alongside other well regarded London-based insurers in the space.
So, what did we learn?
First and foremost, mortgage funds remain a tough class of risk for underwriters to write. However, through dialogue and a quality submission providing context on how the individual merits of a fund stack up, we found there is appetite to take on the risk.
Five key insights from the London insurance market
1. Their capacity and appetite have changed – for the better
The profitability of Lloyd’s has improved in the last 18 months, following several years of loss making. With the required portfolio corrective action having now taken place and improved capital inflows, underwriters are now reporting a greater willingness to consider risks with greater competition for ‘good’ risks. This is timely for financial services firms set to be impacted by AIG’s withdrawal and good news for policy holders all round. Already, we have seen very positive outcomes with Lloyd’s underwriters for clients who found themselves in this position.
2. The underwriters are astute and commercial
We met with over a dozen different underwriters and without exception, they asked intelligent and insightful questions. Like a mortgage fund manager, they have limited capital to deploy, generate fixed returns (i.e. premiums) and their risk selection is everything as the downside to poor risk selection is significant. Some were transparent in that their understanding of mortgage funds is limited given the market is much less developed in the UK. That said, they asked all the right questions and quickly grasped the critical dynamics.
3. They are concerned with economic conditions
As interest rates rise, in a bid to curb the inflationary environment, the impact on property valuations and rising construction costs is front of mind. Underwriters aren’t looking to avoid these risks – they are unavoidable.
How a mortgage fund manages these market risks is of critical importance to them. They are looking for managers that are realistic about these risks and taking steps to manage and reduce the exposure to the extent possible. Articulating your strategy in this regard is critical.
4. Excesses will climb and limits will be shared
Underwriters are keen to cap their risk exposure through managing their line size (limit deployed) and attachment point. Another major adjustment we see is the higher excesses they will be looking to apply. PNO will look to work with underwriters to obtain a range of options to give clients flexibility in managing their level of skin in the game and premium spend.
5. Underwriters want to hear the story of your business
In building a quality submission for underwriters, there are several critical factors to illustrate in order to ‘tell the story of your business’. Some of the key points include disclosing your:
- Governance principles
- Borrowers and property selection methodology
- Investor profiles – Retail vs Wholesale (There are also some wholesale investors they do not like)
- Contributory vs pooled funds
- Information Memorandums
- Portfolio stress testing and changes to lending criteria
Some insurers are keen to explore the intricacies of the above via a video conference with the decision makers of the fund, and we are very encouraging of this approach.
Assistance with Investment Managers insurance renewal
Having met the key underwriters in London willing to insure Mortgage Funds, we are well positioned to represent Mortgage Funds into Lloyd’s. Whilst there are still several obstacles to overcome in order to obtain good policy coverage on reasonable terms, these are navigable with the right support and expertise. We encourage fund managers to work with a specialist broker who understands the landscape and can assist in building a quality submission to ensure the right outcomes. It is critical to invest the time in getting the submission right the first time, as underwriters are time poor, and it can be difficult to change their perception of your business if it has been presented poorly upfront.