General insurance profits 'to fall'

General insurance profits in Australia will come under pressure this year as investment income falls because of the financial crisis, forcing companies to a raise premiums to recoup earnings, a survey finds.

However, profits are likely to improve in 2010 after insurers raise their premiums and restore earnings following two bad years of storm-related claims.

The survey, by accounting firm Deloitte Touche Tohmatsu and investment bank JPMorgan, found the combined ratio or the basic profitability of the industry would deteriorate slightly this year from 2008 levels, as a greater proportion of claims to income was paid out.

Dwindling contributions from reserves following the tort and claims reforms of recent years would also affect profits.

"You've seen profit downgrades in all the major insurers for a little while, and there's definitely stress on the profits of the insurers, against expectations at the very least," JPMorgan senior insurance analyst Siddarth Parameswaran said at a media presentation on Tuesday.

The combined ratio, which measures profitability based on an insurer's core activity, was forecast to rise to 96 per cent in 2009, or $96 paid in claims for every $100 received in premiums, from $94 in claims for every $100 of income in 2008.

However, the combined ratio would fall back to 93 per cent in 2010 as higher premiums boosted the bottom line, the survey found.

The survey, which included insurance underwriters, brokers and reinsurers, found that industry participants expected premium rates to rise, particularly in the domestic classes of motor and home insurance.

Domestic insurance rates are expected to rise by an average of five per cent in 2009 after a three per cent increase in 2008, with household and compulsory third party (CTP) rates to rise faster than motor insurance.

Commercial rates were likely to rise three per cent this year after falling two per cent in 2008, with commercial motor insurance leading premiums higher.

Commercial insurance lines, such as liability and professional indemnity, will come under claims pressure after the large falls in equity markets prompted investors to take legal action against executives and directors.

Premium rates in the past few years were relatively low because reforms enacted by government had worked to limit the size of payouts, allowing insurers to charge lower rates.

"We did see a lot of the benefit of the tort reforms being passed on to the consumer by the insurance companies," Mr Parameswaran said.

However, he said the financial environment now was ripe for rate rises to flow through.

"The industry has been asking for rate rises for a while, but the pressures are so stark right now, and you're seeing all the largest underwriters calling for rate increases."

However, any premium increases would have to be tempered by the risk of losing customers to competitor firms, Deloitte partner Stuart Alexander said.

"The market is still very competitive," he said.

"Whether people try to gouge the market; I don't think that's going to happen."

Large rate increases occurred around 2001 after the high-profile collapse of HIH. This forced the remaining players to raise premiums in response to the surge in demand after such a large player disappeared, Mr Parameswaran said.

The survey respondents included underwriters Insurance Australia Group, Allianz Australia and CommInsure and reinsurers Swiss Re and General Reinsurance.