Commercial premiums climbed at a greater pace than expected last year and are set for further gains, according to a relatively positive JP Morgan Taylor Fry General Insurance Barometer.

Assertions a year ago that the pricing cycle had turned positive have proved correct, with commercial rates jumping 9% last year, building on a 3% gain in 2017.

The outlook this year is for an increase of 8% as insurers seek to improve profitability on their portfolios, and a still-healthy gain of 6% is expected in 2020.

The flagship fire and industrial special risk (ISR) class achieved a 9% rate increase last year after declines of 3% in 2016, while commercial motor rate rises accelerated to 14%.

Better combined operating ratios have also been reported, with domestic classes improving to 78% last year from 90% two years earlier and commercial lines moving to 96% from 101%.

Fire and ISR was the only class to have a combined operating ratio languishing above 100%.

Professional indemnity profitability improved, with rates rising 10%, but claims size inflation increased 8% and claims frequency was up 5.5%. Directors’ and officers’ (D&O) cover is included within the class, partially masking one of the most difficult areas for the industry.

Increased securities class action activity is blamed for surging D&O premiums, with insurers exiting the line or reducing exposure. The Hayne royal commission last year led to multiple class actions against AMP and the inquiry may generate further claims.

“The cost of class actions in the directors’ and officers’ class, particularly relating to breaches around disclosure obligations for listed companies, is approaching crisis levels,” Taylor Fry Principal and Senior Actuary Kevin Gomes said.

“This could create serious implications for a functioning economy if a significant increase in premiums creates difficulty for companies to obtain cover at an acceptable level.”

Mr Gomes says D&O is likely to face further pressure, with litigation funders expanding their presence in Australia and no signs that class action activity will decline.

“Insurers have raised rates, but it is still performing quite poorly from a profitability perspective,” he said.

In domestic classes, profitability has improved over the past two years, particularly in compulsory third party insurance.

“There has been a slight downward trend in the domestic motor and householder ratios, indicating improved profitability in these classes, while the premium rates in domestic classes overall are forecast to remain broadly stable,” JP Morgan analyst Siddharth Parameswaran said.

The overall market benefited from “quite strong” economic tailwinds last year, with unemployment declining and GDP improving.

This year it may experience challenges from the wealth effect of a declining property market, less buoyant conditions in China and business confidence impacts that often emerge in an election year.

The more positive commercial lines environment comes against increasing regulatory concern, with the Hayne royal commission’s final report to be released this afternoon and the impacts of other reviews still in train.

The Productivity Commission last year reported on competition in the financial system, targeting the insurance sector over a proliferation of brands that mask a smaller number of underwriters.

The Australian Competition and Consumer Commission inquiry into northern Australian premiums has also released its first interim report, containing recommendations and draft proposals including a ban on commissions and another examination of comparison websites. It will release its its next update in November and final report next year.

Underwriters, reinsurers and brokers surveyed for the JP Morgan and Taylor Fry barometer name regulation and compliance as a leading issue facing the industry.

Other issues include profitability and competition in commercial classes, particularly in D&O, the hardening ISR market, the growing threat of cyber losses, surplus reinsurance capacity and insurtech.

Regulatory changes are likely to provide headwinds in the year ahead, and some classes require further improvement.

Several reports on the global industry last year suggested the Australian market was leading the trend to rising premiums. With the commercial pricing cycle remaining in a positive phase, the barometer suggests the industry is in a relatively good position to maintain its upward move.