Australia’s general insurance industry made a strong financial comeback last year, after unprecedented pressures caused by the 2019/20 Black Summer bushfires and the covid pandemic, KPMG says in a new report.

But it warns the respite will be short as climate change and other pressing business challenges remain.

The industry more than tripled its insurance profit to about $3.48 billion from $915 million in 2020, as insurers enjoyed a surge in premiums on the back of a long-running favourable rate cycle.

Industry-wide gross written premium (GWP) for the 12 months to December grew 11.2% to $53.82 billion.

KPMG says the average GWP quarterly increase for last year was 2.6%, describing the growth as the “highest percentage movement” it has seen in recent years.

Rates across all personal and commercial lines of businesses went up last year, in some cases by as much as nearly 24%, according to the report. The commercial property and professional indemnity classes stood out with premium growth rates of 16% and 23.9% respectively.

The only exceptions are compulsory third party – where premiums stayed relatively flat – and employers’ liability products.

“These rate rises are a result of insurers continuing to price products to reflect the underlying risks and costs of a policy which will drive a more sustainable product,” KPMG says, adding the industry is continuing to “reprice for claims cost inflation”.

It says that along with firmer prices, the industry has also increased the number of risks underwritten, particularly in motor and home classes as well as commercial property and commercial professional indemnity classes.

KPMG says the sharp rise in profits has been achieved with no similar corresponding rise in claims cost, a stark contrast to 2020 when earnings took a huge dent from a string of significant natural disasters including the Black Summer bushfires and initial recognition of covid-related business interruption provisions.

Crucially for the industry, it recovered from an underwriting loss of $185 million in 2020 to record a $3.56 billion profit.

While last year was a more positive one for the industry, KPMG says pockets of weakness remain, such as in the travel product line where GWP is still well below the levels seen before the pandemic. Travel GWP last year was about $234 million, compared with nearly $1.2 billion in 2019.

“Consumer interest has not yet reached pre-pandemic levels which is also consistent with the GWP trends,” KPMG says.

The investment side of things also remain underwhelming, the consultancy says, pointing out the industry netted just $510 million in investment income last year. In 2020 investment income exceeded $1.4 billion.

The KPMG report, an annual examination of the industry’s performance, also explores the issues facing insurers in the coming years.

The biggest challenge ahead for insurers is climate change and its compounding effects on the severity and frequency of natural disasters, coupled with premium affordability and insurability of areas that are more prone to floods and other weather events.

KPMG says the industry is increasingly concerned that the frequency and severity of natural hazard events will significantly push premiums up and make some areas uninsurable.

“The industry may not be able to sustain insurance in flood-prone areas and is looking to the Government to implement flood mitigation measures to reduce the impact to communities when natural hazard events occur,” the consultancy says.

“There is a looming market failure and potential significant risk of underinsurance for some locations and classes of assets as natural perils become uninsurable.”

Insurers have stepped up their calls for increased government spending ahead of next month’s federal election, pressing Canberra to fund disaster resilience measures that reduce the impact of future catastrophes.

At present just 3% of natural disaster funding is allocated towards improving community resilience, with the remaining 97% set aside to support post-disaster recovery efforts.

Insurers will continue to face a higher exposure to natural perils, such as floods, bushfires and cyclones as climate change accelerates, KPMG says.

“Modelling predicts the frequency and severity of these natural peril event trends will only continue to increase.”

Other issues that made it to the list of challenges facing the industry are changing customer expectations, simplification and cost optimisation, innovation and cyber security, competition for talent and regulatory and compliance transformation.

On customer expectations, KPMG says the insurance industry continues to lag behind its peers in other sectors when it comes to offering “best in class” experience. This is particularly the case for personal lines insurance providers.

While it says some personal lines insurers have made significant investment in digitising and improving the front-end sales process, improvements have been lacking in other areas, notably in claims management and policy changes.

KPMG says the process for managing claims or amending policy details is often “slow and difficult” for consumers.

“Personal lines insurers will likely need to make significant changes to their operating models if they hope to retain their customers and avoid becoming commoditised,” KPMG says.

“Insurers should start to focus on making the purchase, use and renewal of insurance policies simpler, faster and more tailored from the onboarding process through to claims process by leveraging easy-to-use digital tools and digital services across the journey.”

Click here for more from the report.