PI insurance at the crossroads

The professional indemnity market in Australia has been buffeted over the last few years, and many are waiting for a break in the weather. But key players in the sector at a recent Executive Insights panel on Insurance Business TV suggested it was still too early to judge with confidence what lies ahead.

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Danny: [00:00:24] Welcome to Insurance Business TV. I'm Danny Wood, news editor of Insurance Business Australia. In this Executive Insights panel sponsored by Allied World and FTA Insurance, we're exploring the professional indemnity insurance market. This year it looked like insurance market conditions generally, including in some areas of PI are starting to improve after years of rapidly rising premiums and a hard market look at trends and challenges across the PI market, we have a panel of four assembled. Christian Garling, director of FTA Insurance. Hi, Christian. 

Christian: [00:01:00] How are you doing? 

Danny: [00:01:01] Good. We have Arne Boysen, assistant vice president, underwriting manager of Allied World Australia. Hi, Arne. 

Arne: [00:01:09] How's it going? 

Danny: [00:01:10] Good. And we have Andy Wass an insurance broker with JMD Ross Insurance Brokers. Hi there, Andy. 

Andy: [00:01:17] Hello Daniel, nice to see you. 

Danny: [00:01:19] You too. And Ben Robinson, he's placement manager of professional and executive risks at Honan Insurance Group. Hi, Ben. 

Ben: [00:01:27] Hi there. 

Danny: [00:01:29] Okay. Well, let's get started. Christian, let's begin with you. How do you see the PI market, generally speaking? 

Christian: [00:01:35] I think we've seen a number of years of hardening of the market, which is definitely been needed. And I think the market is broken into a few different segments. I think that there's the the Lloyd's side of the market, which is definitely going through significant hardening. And so if risks are going into Lloyds, you will see significant increases in premium and tightening of terms. And then you've got the local Australian market and I think the Australian market is divided into target type risks. We are seeing increases in line with turnover and maybe a slight rate increase. And then you've got areas where there's no one losses and those areas have known losses have had significant rate increases because insurers have needed to in order to obtain a profit. 

Danny: [00:02:21] And on a you regard the market as as complex. I guess Christian was alluding to that. So what complexities are playing in? 

Arne: [00:02:29] Yes, because the PI market is very broad and it covers a wide variety of professions. And within these professions can be multiple activities. And to make it even more complex, they perform these activities and services within different sectors, and these individual sectors can carry their own concerns. So if we actually sat there and broke it down within different class or professions and we'll be here for the whole day, but I think, you know, as a whole you have to look at there's actually a really good stat of the 2020 APRA and National Claims and quality database. It actually shows the average premium in 2020 is just below $3,000, which is pretty much the equivalent to 2009, just just after the GFC. And you can see that was actually $3,200 for the average premium. So we're starting to get to that level. So we're going to see, you know, are we going to increase to that level or are we going to start to plateau? And and I do think we have to wait for the 2021 APRA national claims database and hopefully we just out in July and that'll sort of show us if premiums are average, premiums are still increasing or is it going to start to plateau out. 

Danny: [00:03:45] And are you bringing you in here? What's the broker perspective on all this? 

Andy: [00:03:49] I have to echo pretty much what Christine and I say now, but generally, we're certainly still seeing the higher rates the last couple of years. And here it changes us. We sort of specialize in the PI for construction professionals and we're certainly expecting to see a little bit more hardening this year. And we are seeing the green shoots that we're obviously talking about today, though, and there are insurers showing appetite again. And there's been lots of meetings recently about insurers really wanting to demonstrate that appetite. Always been an example. Just only two or three weeks ago we met I also met very interestingly with a senior Lloyds underwriter last week, face to face, sort of flown over for the first time in a couple of years, which is great. But just for instance, in relation to the structural engineers and geotechnical engineers, which have been really difficult to place the last two or three years, there's actually a market there now, which is a really good sign for this year and going forward. And just on sort of renewal business as well, I heard a very rare term that, well, two or three times the last few weeks for rollover premium, i.e. the same premium going forward, which certainly not held for two or three years, and to quote a British phrase, rare as hen's teeth. But anyway, I think what we're looking at now, there is a bit of consistency. As Christian said, it's you've got the Lloyds Bank, you've got the local Australia market, and it's still not quite consistent in what the insurers are doing. But I think we're getting there a little bit this year. But early green shift is probably my message. 

Danny: [00:05:23] And Ben, what about you? We look at the API market generally for this question, but as you said before, it's really not just one market place, is it? 

Ben: [00:05:32] No, it's exactly right. I think overall the market still faces challenges. However, it's tough to sort of categorize it into one single market place as there are industry professions which are performing well. There's certainly those that are certainly weighing down the overall market. So I think as the gents have said there, I think, you know, there's certainly areas that are performing in their on the other areas that that are performing, which is creating that hardened marketplace still. I think you've still got APRA's 66, which indicate that there is still some way to go before the market achieves correction, as they still show perform loss performing ratios. So I think we just need to ensure that we monitor that carefully and hopefully that starts to start to balance out as green shoots starts to trickle out of Lloyd's. 

Danny: [00:06:22] Let's stick with you, Ben, for the next question. I mean, how do you how do you see what's what's behind any improvements that we are seeing in the market? 

Ben: [00:06:31] Look, I think better balanced portfolio is, I think where some insurers have been heavily weighted to some of the owner of sectors of the industry professions. We're starting to see more targets around miscellaneous business and more stringent underwriting has certainly been a major player in trying to improve those PI markets. I also think insurers are now more also more risk savvy and are beginning to appreciate their risk appetite more, which obviously means greater controls and less reliance on insurance. Insurance is a direct risk transfer strategy. We're also seeing minimum deductibles be applied to a lot of PI insurance programs, which essentially is trying to insulate those insurer portfolios for those smaller under deductible limits claims. 

Danny: [00:07:15] And Andy, what's a broker perspective on any improvements we're seeing? 

Andy: [00:07:20] Yeah, I think the minimum deductible point in the pension just made is really good, actually. But to the underwriters in the room, I would say that the improvements disciplined and controlled underwriting, but that's that's all good. But I think behind the improvements, we're probably it was a soft market for so long. We've actually reached sort of maybe the correct sort of level of premiums that make it a bit more sustainable, make it a bit more profitable. And that's the big question is whether they really are at the right level. We may need a bit more hardening first. And the Lloyd's example is interesting. I've just a couple of stats in front of me, but they're coming back into the market. But that's because one of the reasons March 2022, they announced their results and there's been an overall profit of 2.3 billion and following a 0.9 billion loss in 2020. So they're sort of feeling a little bit better about things in that respect. And they have seen 16 consecutive quarters of positive movement. So behind the scenes, there's some good stats to maybe show the insurers could be keener from now on going forward. 

Danny: [00:08:29] And Arne, you've been noticing that the insured have been getting a bit more involved in things and that's helping. 

Arne: [00:08:35] Yeah. Like they are like in shorts are getting a lot more risk adverse and you know, and brokers are assisting in becoming that. And because, you know, they're starting to look at contracts very closely like how to limit the own liabilities within contracts. And I've seen insurers not take contract because the things it's not, it's not like the liability is unlimited enough. Also experience where insurers are looking at their internal activities or professions and might not actually do particular risk that is classified as high risk. So, yes, so they are becoming a lot more risk adverse. 

Danny: [00:09:11] And Christian, what's the underwriter situation in all this? 

Christian: [00:09:14] Well, I think they've over the last few years, the insurers and the Lloyd's guys have really pulled back from those areas that we're giving them large losses. And if you look at the national claims and policy database that I was referring to in the 2015 year of account, they're running at a 90% loss ratio, which, once you add expenses on top, means they're losing significant amounts of money. So they needed to pull back and needed to make those changes. In Lloyd's, what's driven the change is been a reduction in supply of insurance. So Lloyd's has said to the syndicates, you have to write less business this year than you wrote last year. And in doing that, then the syndicates in Lloyd's have to decide which business to let go, which business to keep, and that has reduced supply. And as everyone knows, if you reduce supply and demand stays the same, then price goes up. That increase in price has led to increase in profitability and that's starting to show through now. But we do have to remember that this is long tail business and from when you write the policy to when you know your final cost in any year of account is about 6 to 7 years. So not quite ready to count our chickens yet. 

Arne: [00:10:26] I can actually assist Chris today because that data actually shows that in 20 1516, the average PI premium was $2,000, which is the lowest it's been between 2009 and 2020. 

Danny: [00:10:40] Okay, that's interesting information. Let's try and get a bit specific and look at some areas of the PI insurance space that actually are starting to do better. Andy, can you kick this off? 

Andy: [00:10:51] So as I said before, we've seen some of the green changes, but I would stress they are just early stages. And just last week, as I said before, meeting with a Lloyds underwriter who most insurers, for instance, in my space, the architects, engineers, for instance, it's been really difficult to place risks for a couple of years, particularly the new business. And that's been the first time in sort of 17 or 18 years, to be perfectly honest, the fact that insurers are showing this appetite and that's in terms of writing the business. But also just the last few days, I've been negotiating the actual policy terms with them. So historically, the last 2 to 3 years, getting things like contract liability extensions, which I was just touching upon, getting those with new business and new underwriters was a big no. I'm actually getting a yes to those just in the last week or so with a good Lloyd's underwriter, which I see is really positive. I'm not sort of jumping ahead, though. I definitely agree with what Christine was saying. We've really got to take this pinch of salt at the moment. And the Lloyds market particularly capacity is still restricted. And yeah, we've got one, maybe two underwriters showing some keenness, but take it slowly, and that's partly my message. 

Danny: [00:12:09] And what about you? Where do you see things starting to look a little bit more promising? 

Arne: [00:12:14] Yeah, look, I'm seeing some some professions are seeing, I guess, competitive pricing. And these tend to be more like your SME fit the box types risk where high volume is key. But I guess the concern there could be oversupply of insurers or big competition and but for a limited insured market. 

Danny: [00:12:38] Ben, what about you? 

Ben: [00:12:40] To suggest such as Andy? I think we're sort of starting to see those architects and engineers whilst rates are still consistent where they have been. There's been capacity that's been, I guess, green shoots coming out of Lloyds, which obviously puts more optionality on the table for buyers, which is obviously driving a little bit more competition here locally, which now we're really excited about. At the same time, we're starting to see financial institutions such as equity fund managers, wealth managers, family offices start to get a little bit more of a look in at some new players, particularly at Lloyd's. So again, more optionality for buyers where two really challenged classes of insurance for a number of years starting to level out a little bit, which is exciting. 

Danny: [00:13:21] And Christian, what's the underwriter view on this? 

Christian: [00:13:24] Well, it depends where the underwriters are targeted. We don't target a lot of that high exposed business like engineers and architects and so forth. We really do target the sort of lower exposed miscellaneous type business IT type business and those have performed very well. So we've been able to keep our rates much more competitive than the rest of the market because we've targeted those low exposure areas. So I think those low exposure areas that we target have performed well and will continue to perform well. And those other areas which are much more higher exposed, which other people target, will continue to have issues in them. But hopefully those issues are reducing as the insurers make a little bit more profit. 

Danny: [00:14:11] Let's look in a bit more detail at those areas that are still struggling and construction and D&O come to mind rapidly on that. Let's start with you, Arne. What's your view on this? 

Arne: [00:14:24] Yes, the market I'm seeing, the struggles in both an appetite and capacity is the construction PI area. And we've just been affected by by cladding situations such as the the Grenfell Tower in the UK, Spencer Street Building in Melbourne. Yeah. So and then there's also increases in notifications on residential high rises like building defects, structural defects, waterproofing issues. And I guess the concern of that is from a client perspective is that all parties do get involved with these claims. You know, you're talking from the builder, the project managers, the engineers such as the structural engineers, civil engineers, architects certified because they're all getting involved. You know, the claims can take quite long to settle and the cost, there is a lot of cost into it. And then the other factor is you can actually get cross claims. So where the builder might sue the structural engineer, for instance. So yeah, so the claims do drag on for a bit and do become quite costly. 

Danny: [00:15:31] Christian, Is that your experience? Is the claims issue dragging you down to? 

Christian: [00:15:36] Well, I completely agree with Ana about the construction area. And we do write some builders design and truck risks, although we tend to target the lower exposure areas. So we haven't had the significant issues in that regard, although the claims do drag on. The other area I would point out, though, is the the financial risk professions. So financial institutions, fund managers, financial planners, life insurance brokers, even mortgage and finance brokers, those areas have also had a number of issues because it's been claimed in that area as well. So those financial areas are still suffering losses and insurers are still pulled back a lot from those areas that the royal commission has been a big impact on that, and that's really scared. A lot of insurers away from that area made them very reticent to go back into it. So as much as you have issues in the construction area, which I completely agree, you've still got a lot of issues in the financial area as well. So I think there's two areas that are both suffering significantly. 

Danny: [00:16:39] And he is a broker caught in the middle of all this. Where do you see the struggles? 

Andy: [00:16:44] Probably focused on the construction field a little bit because that's where we're seeing some of the challenges. And what I mean, Chris, you've said that, but the green shoots were there, but it's still a very limited market. And what I was mentioning in terms of claims, certainly I used to say sort of ten years ago, very little of my time was spent on claims, but now it's sort of 50, 60. I'm involved in the mediation this afternoon, typical engineering matter, but they're the 11th respondent on a matter because they're being dragged into so many matters and it is long tail. It goes on and on and on. And that's typical of the market at the moment, which isn't really going to attract insurers back into the market. And indeed, just the last couple of months, we have seen, as we all know on the panel, this one of the large insurers have withdrawn from the corporate construction professionals field and just only a few weeks ago, which is another symptom of the market at the moment. And then the insurers. Probably too much risk to reward a little bit. One of the changes that we've seen in the construction field the last couple of years has been the introduction of the Design and Building Practitioners Act. And this was David Chandler and his consort to try and improve some of the issues in the construction field. And hopefully we will have some of the parties that shouldn't be around and just just improve it. So you've got better parties in the industry and then hopefully ultimately attract the insurers back into the market. I'm positive about this act overall, but because there's a ten year retrospective period involved in it, third parties can now make a claim and so forth. If I get too technical, but what we've seen in the last 18 months is an increase in the number of claims rather than a decrease. And that's to be expected in some respects because we are weeding out certain parties, but also it's easier to make a claim. The problem with that is we're not going to be attracting the insurers back into the market with more claims at the moment. And indeed one or two of the insurers in Australia have actually introduced exclusions in relation to this act. And just for those who don't know about the act, it's for the Class two building. So the residential, the high rise buildings and lots of engineers do that sort of work. If you've got an exclusion on the policy in relation to that, the policies aren't worth that much. So. So, yeah. 

Danny: [00:19:10] And Ben, how about you? Is that the claim space in this construction issue a big factor for you as well? 

Ben: [00:19:17] Yeah, definitely. I think everyone's touched on the most challenged areas and one being construction and the other is large accountants, financial planners, lawyers, valuers, mortgage brokers. They continue to face supply and demand issues. And I think as Andy's just touched on, we'll see a large international carriers just stepped out of the market, reducing capacity, which they were a large, I suppose, shareholder of capacity in a lot of the financial institutions space has been planners and construction. So again, that's going to be really challenging to try and obviously find new capacity that's willing to step on and over the next 6 to 12 months. But now we're certainly again starting to see some other areas which are starting to show stronger profits and signs of more consistency. I think you also touched on D&O as well there. I think no one's really touched on that. But we're certainly, I guess over the last quarter showed greater signs of stabilisation. And we're really optimistic this will improve for insurance buyers in 2022 and have a number of ASX listed accounts. And we've, we've seen a lot of positive renewal rate, income I suppose outcomes over the last six months or so and we really, really optimistic about where that's going, particularly with again the optionality for buyers where you've got Lloyds stepping back into the Australian market and being quite aggressive. 

Danny: [00:20:42] Let's, I guess, switch gears a bit here and and look specifically at how insurers have been adapting to this sort of peer pressure. Christian, let's start with you. 

Christian: [00:20:52] Well, I think they they've been suffering losses, so they've pulled back to their core portfolio and moved away from the areas that were giving them losses. And I think we've discussed that a lot. The other thing that they've done is they've reduced limits as well. So instead of offering a 20 million limit, they're offering a ten mil limit. Instead of a ten mil limit, they're offering a $5 limit. And I think this is something that's been quite prevalent in the Lloyd's market for many, many years. They're used to layering of risks. The Australian market, we haven't been so used to it over the last 20 years of lowering, layering risks. And I think it's a really good strategy for insurers that might have a higher exposure to bring in a small primary layer of, say, a million or 2 million or 2.5 million, and then build a program above that, because the primary insurer, even if they do have a loss, that loss is contained within one or $2 million. And that's where a lot of the losses do happen. And then the excess layers, they feel more comfortable because they're higher up and they can charge a more competitive premium. So one of the things I think we'd like to see more of is that layering of programs, and I think that would help the insurers as well because At Risk manages it. So if they do have a claim and their primary insurer decides to move away, it's much easier to replace a one or a $2 million primary than it is to replace a whole $10 million. So I think that's one area where people have have started to change things. And I think that's challenging brokers to think about that a little bit more and think about their placement on that, those more difficult risks. 

Danny: [00:22:30] And I think you also have been seeing exclusions, that first thing that Christian mentioned there. 

Arne: [00:22:36] Yeah, look, look, I totally do what Christian said then. I do think, you know, building the smaller layers is probably better for insurers and brokers and falling short because it's easier to pay a 2 million or $3 claim than a $10 million claim. It doesn't hurt the book as bad, but yes, I'm definitely seeing exclusions being applied and that that's being, I guess, triggered about what's happening in the market or what's happening in the sector was happening, you know, economically, for instance, because after the Grenfell Towers in the UK you saw cladding exclusions being applied, then non non-compliant exclusions being applied, consequential loss exclusion being applied for repetitive designs. And then obviously, you know, you see covered exclusions being applied as well because there is it's the structural and the structural construction companies that have been affected by, you know, supply chain issues, loss of skilled workers. And you've actually experienced that some of these construction companies going insolvent as well. 

Danny: [00:23:40] Andy, you're a construction specialist. Tell us a bit more about what's going on there. 

Andy: [00:23:45] I definitely agree with what Christine was saying before about the layering, Danny, the last sort of two or three years, it's certainly become before before the last two or three years, we typically maybe have one insurer, the first five, 10 billion and then another access layer. Now, I remember sort of two or three years back, the first one I placed where it was a 1 million primary into the market and then there was a 90 million over one over in the Australian market here, and that was on a round the clock reinstatement basis, which is quite new, sort of running through the whole 20 million before coming back and in terms of probably Christian. We've had to think differently about these things. We certainly start the renewal process months in advance these days and even then we can be sort of quite tight on time because we have to speak to so many different insurers to place the larger risk. So that's sort of a management thing with the client and the insurers, to be honest. And then, yeah, the increased excesses is another point I would say so insured excesses. Whereas for for instance, an SME engineered four or five years ago, you might have seen 10 to 25000 self insured excess. Now it's not unusual to see more like 100 K for that sort of practice, and that may be shocking to some of the newer entrants into the market, i.e. the new engineers have placed a bit of new business the last couple of weeks and when they don't know too much and you start talking figures like that, they're not aware of that. But it has become more of known for for many firms. And that's just the markets, not necessarily claims experiences or things like that. It is just insurers sort of being selective on the risks and trying to manage their own exposures. 

Danny: [00:25:28] And then in terms of insurers adapting to these pressures, you've been noticing that they haven't been targeting new business like they used to. 

Ben: [00:25:36] Yeah, look, I think Danny just touched on that as well. I think where we've seen some struggles is whilst. Some insurers are reducing that capacity, obviously having to try and find new capacity. It's been a real challenge, trying to sometimes find that new capacity where those insurers that would typically write that sector of professions is looking to insulate their portfolios and get their own house in order before they start to go increase their volumes of their portfolio, which in essence, could heighten future claims. But in the frequency of claims. But I think new business has been a challenge for new insurers to be to bring that on. So. But, you know, again, we are starting to see that alleviate a little bit now through those strong profits which are being drawn. So now we're we're starting to see insurers take more interest in trying to go after some new business targets now where they hadn't over the last 12 months. 

Danny: [00:26:32] And Ben, let's stick with you for our last question. What do you see as the main challenge in this space over the next six months or so? 

Ben: [00:26:39] Yeah, sure. And I think I wouldn't categorically put it into the next six months. And I think if we can summarize what we've all spoken about, the common theme today, I think it's more also ongoing. And firms will presenting a more comprehensive. Firms will be presenting more comprehensive risk profiles essentially to insurers to ensure that these aspects of concerns, the liabilities, can be addressed in advance. And I think that allows for more accurate and sustainable underwriting. I think Ana touched on that earlier. The challenge, more so than ever, is pressures we see as brokers on those underwriters to write profitable business. And with this takes time and more detailed information to make a well-informed decision. And Andy says, we are starting this process months and months in advance, not only obviously to ensure that we can achieve capacity requirements, but at the same time adapt to those underwriting pressures where more risk, more robust risk profiles are required and more stringent underwriting is being adopted to ensure that well informed decisions are made to create that sustainable business for them. So, you know, that's where I see ongoing. I don't see that over the next six months, but I see that into the near future. 

Danny: [00:27:54] And what about you, Andy? You were mentioning hard market pressures earlier. 

Andy: [00:27:58] You have been saying there actually that it's not just the next six months. It really is a longer term perspective, or at least medium term. And, well, the answer to this, the main challenge, there's many answers. There really are. I'll leave the underwriting sort of answers to to Christian and in a few moments. But just maybe a more different answer, perhaps. But as a personal sort of concern as a broker and we've sort of been delivering pretty decent premium and rating increases to insure the last sort of two or three years. And there have been significant increases in many cases, and we're going to hit them. We are hitting them again this year. And just just a concern from those firm perspectives. They're doing it tough, a number of them, and the carbon impact, obviously, and so forth and whatever else it may be, competition in the industry for themselves, but PI on their sort of expenses list each year is really well up their top two or three expenses and we're hitting them again. And that's the nature of the market. Pretty much all of our clients understand that we've all as brokers, we've all delivered that message to our clients. So it probably won't be a shock as such, but just a concern as to how difficult it is for those firms again. And it's not going to get any easier, six, 18 months, whatever it may be. 

Danny: [00:29:16] And, Arne, you see challenges in the construction market ahead. 

Arne: [00:29:20] Yeah, look, there'll always be challenges in that in the insurance industry as it's an industry that's affected by a number of factors such as the economy, whether competition claims, etc.. So I guess for the high risk sectors, I guess the question will be like, are we going to see markets reduce more capacity and are we going to see more increases of premiums or is it going to be markets that actually leave the sector completely? And on the other hand, you know, could just end up being a positive result. So do we see market return and do we see new entrants due to the lack of competition and also for premium potential? But what I would like to see probably and what brokers would like to see from insurers is, I guess, consistency to market to service our brokers and also know coveting short in the long term. 

Danny: [00:30:15] And Christian, finally with you, you're concerned that insurers are going to have trouble being profitable in the future? 

Christian: [00:30:22] I do. I think what we haven't talked about yet in terms of the construction book is claims inflation. We all know that inflation is significant in the building area at the moment. It's hard to get goods and services. It's hard to get products. There's a lack of supply of builders and tradespeople, particularly some of them are caught up with the property. Damage claims have come from floods in northern New South Wales and Queensland. The delay there to get repairs done is two or three years wait to get your your house fixed. That's going to flow through that increased cost is going to flow through to the claims costs in the construction professional indemnity area. And you may well find that you've got claims inflation of ten or 20% on your back years and I don't think that's been priced in yet. So when people are looking at pricing at the moment, they're comparing it to historical loss ratios and they haven't included that 10 to 20% claims inflation, but they're going to get hit with over the next couple of years. So in terms of construction, I think that's a real challenge going forward to maintain profitability. And as Ana said, I think consistency is really important. Insurance don't want premiums going up or down all the time. They want consistent premiums so they can budget into the future. They're happy with two or three or 4% increase in premiums because they can budget that and that can match the increase in revenue that they're getting. What they don't like is when premiums go down and then go up and then go down and then go up, that makes it very difficult for them to run their business. So we very much try to keep our premiums consistent and I think that is from having an established appetite and established portfolio where, you know, the claims costs that are going into those portfolios. So I think if insurers can stick to their knitting, as it were, do what they've done historically and not try and go out and increase their market share substantially, then they will keep consistent premiums and insureds will be much happier as well brokers. 

Danny: [00:32:27] Let's hope we can all stick to our knitting. Thanks very much for your time, gentlemen. 

All: [00:32:31] Thanks very much, Thank you, Thank you very much 

Danny: [00:32:32] Sure. We've been talking with Christian Garling from FTA Insurance, Arne Boysen from Allied World Australia, Andy Wass JMD Ross Insurance Brokers and Ben Robinson from Honan Insurance Group. You've been watching insurance business TV. Thanks for your time. Bye for now.