Insurers face a profit squeeze on some lines as rising costs from severe weather events may not be fully passed on because of increasing competition, a survey finds.
However, the same survey, by KPMG, also found the industry was still in robust financial health because an improving economy and rising interest rates, which bolstered investment income.
KPMG insurance partner Ian Moyser said the continuing expansion of smaller players in the industry, particularly on personal lines of insurance such as home and car, would produce further pricing competition.
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"Whilst their level of penetration into the market is relatively low, the question is whether we are seeing a significant change in competitive dynamics in the personal lines market," he said.
KPMG's 2010 General Insurance Industry Survey, released on Tuesday, showed competition among commercial insurance lines remained high, meaning slower growth in premiums for businesses.
KPMG said continuing growth in the Australian economy would drive growth in the insurance industry in the year ahead.
However, it said a strong underwriting discipline would need to be maintained as investment markets wee not expected to produce strong returns.
The survey found that major insurers including Insurance Australia Group Ltd, Suncorp-Metway Ltd and QBE Insurance Group Ltd, performed well in the year to June 30, despite severe weather in March.
KPMG estimated that storms in western Queensland, Melbourne and Perth cost the insurance industry over $2.1 billion.
This took annual weather costs to their highest since 1999 when a Sydney hail storm cost the industry $1.7 billion.
KPMG said overall industry profits in the year to June 30 were up 10 per cent on the previous year to $3.5 billion, due to stabilising financial markets and rising interest rates.
It found that insurance margins rose to 14.5 per cent, from 11.5 per cent last year - reflecting gradually increasing premiums and the Reserve Bank of Australia's rate interest rate rises.
Premium rises were most prevalent in home and car insurance polices, and the trend of severe weather in recent years was likely to see premium growth continue.
"The last five years has seen some significant events in each of those years, relative to the first five years of the decade," Mr Moyser told journalists.
"If that trend continues, we would continue to see these significant costs.
"And we've recently seen an earthquake in New Zealand, a fairly significant storm has just blown through New Zealand as well, so based on the evidence of the last five years, it's going to continue to a factor for Australian insurers.
"Insurers will have to price to cover the cost of the claims they have to pay out."