The Australian insurance industry is in good shape despite a couple of severe weather events this year. That’s the view of KPMG in its latest general insurance industry report released last week.

It says premiums grew by 6.3% to $37.6 billion in the 12 months ending June 30 this year, while the underwriting surplus grew to $1.9 billion, and some insurers returned to positive territory.

Profit for the major insurers in the 2010 financial year was higher at $3.5 billion and the return on equity was at 12.1%.

“General insurance in Australia remains a robust business and the current results show that insurers generally improved their performance, despite the further claims from severe weather events,” KPMG Insurance Partner Ian Moyser said.

So it’s a rosy picture for the last financial year, but the industry is not without its problems.

Mr Moyser told insuranceNEWS.com.au severe weather, taxes and regulatory change are all issues for the insurance industry during the next couple of years.

Storms in Queensland, Melbourne and Perth during March have cost the industry an estimated $2.15 billion, and Mr Moyser says major weather events are becoming more common.

KPMG has looked back to December 1987 for trends. While there have been significant weather-related catastrophes during that period – such as the $1.7 billion Sydney hailstorm in 1999 – the last five years have seen a significant increase in events.

In June 2007 there were the Queen’s Birthday storms costing $1.5 billion, and since then there have been further storms in most half years resulting in more than $1 billion in claims.

“It would appear these events are becoming more normal, and the past five years have seen an increase in weather-related catastrophes,” Mr Moyser said.

“Clearly insurers are now calculating the severity of these events into their risk pricing.”

But Mr Moyser admits it is getting harder to price in the risk of weather catastrophes, and he suspects there has been an element of catch-up by the industry as the risks grow.

He says there is also another factor in the rising cost of these claims.

“There are more of us today, so when we have a catastrophe in a major city it impacts more people than it did in the past.”

And then there is the vexed question of insurance taxes and the disincentive they provide to people insuring adequately. He says while the industry has welcomed Victoria’s decision to remove the fire services levy, there are still more taxes on insurance products that add to the underinsurance problem.

“Taxes are an ongoing impedance to the industry,” Mr Moyser said.

The KPMG report says taxes on premiums, including stamp duties and emergency services levies, are among the “least beneficial of Australian taxes” in terms of their impact on the economy.

“They lower the uptake of insurance by households and they raise the cost of doing business,” the report said.

KPMG has looked at the burden of taxes on the consumer and found insurance taxes led to 67 cents of consumer welfare loss per dollar of additional revenue.

This compares to the impact of the GST, which is at 8 cents, and income tax at 24 cents.

KPMG says there are a number of reasons for the high economic impact of insurance taxes.

“First, insurance taxes are applied to a narrow tax base – insurance premiums,” the report said. “If taxes are applied to only one product (as insurance taxes are), then there is more opportunity for households and businesses to substitute away from consuming that product, leading to a greater loss in living standards.”

The second reason highlighted in the report is the fact that insurance taxes have a high effective rate.

“While the statutory tax base is typically the value of insurance premiums, the true cost of insurance services to policyholders is the value of premiums less the benefits that are paid to them,” the report said. 

“This is a much smaller tax base than the statutory base, which means that the effective rates of tax are far higher than the statutory rates.”

Mr Moyser says proposed regulatory changes might also have an impact on the profitability of the insurance industry in the future, but this is a low risk.

In Australia the Australian Prudential Regulation Authority (APRA) has put out a number of discussion papers on capital levels for insurance companies to ensure they have the financial strength to survive sudden shocks.

“The objectives of the APRA papers are more risk-focused, but are not designed to cause the insurance companies stress,” he said.

“But as we have seen, the industry is strong. It has been able to withstand a $2 billion event this year.”

According to the KPMG report, the industry’s capital coverage at December 31 last year was 1.91 times APRA’s minimum capital requirement, compared to 1.85 times at December 31 2008.

Mr Moyser says this indicates the Australian industry is well-capitalised and APRA is not proposing to increase the overall level of capital.

“We say the Australian insurance industry is in good shape but it does have some issues facing it in the future.”