Australian insurers have established a stronger position in the past financial year, but they may now be heading for a storm cloud of competitive challenges.

Combined insurance profits among companies surveyed by KPMG grew 8.3% last fiscal year to $4.96 billion, the highest figure since the global financial crisis.

But major players such as IAG, Suncorp and QBE face increased competition from challenger brands, and IT companies like Google may even encroach on the industry’s turf.

“KPMG Australia believes the industry is facing increasing competitive pressures, which will impact premium growth in the coming years,” the professional services group’s General Insurance Industry Review says.

Gross written premium (GWP) increased an estimated 3% to $32.58 billion last fiscal year, driven by gains in commercial insurance, while personal premium levels were relatively flat.

“Several insurers have announced a strategic focus on underwriting discipline, electing to focus on higher-margin business with lower claims frequencies,” KPMG Asia-Pacific Head of Insurance Accounting Scott Guse says.

“Willingness to sacrifice premium revenue growth for a higher-quality portfolio appears to be a response to the increasing price competition from challenger brands and products.”

Premium growth slowed over the year and was also affected by the end of the Victorian fire services levy.

Competition has emerged from online insurers, aggregators, “white labelling” of products and non-traditional providers such as supermarkets. These players have expanded strongly from a small base, the report says.

A sample of challenger brands found their GWP grew nearly 25% last fiscal year, compared with less than 5% for the industry as a whole. The challenger growth rate slowed slightly compared with 2012/13 but has surged from about 15% two years ago.

“While the largest insurers continue to dominate the Australian market, several of the smaller brands have demonstrated outstanding premium growth in recent years,” Mr Guse says.

“The question remains as to where the next round of competitive challenge will rise from.”

Delegates at the recent International Insurance Society conference in London flagged major IT companies such as Google, Amazon and Facebook as future threats.

Australia is yet to see any movement by these companies but KPMG says they have “dipped their toes” into various international markets, and success could prompt further expansion.

“If the major technology companies flex their corporate muscles in the insurance sector in a manner similar to their entrance into other industries, it could very well change the playing field for all involved.” Mr Guse says.

The Australian insurance industry benefitted from benign catastrophe conditions last year, which helped underpin its performance, and some companies have focused on cutting costs and improving technologies and systems.

The combined operating ratio improved to 87.7% from 89.8% as the expense ratio dropped to 26.1% from 26.4%, while the loss ratio fell to 61.6%, its lowest in the past five years.

The industry’s capital coverage at June 30 was 1.9 times the Australian Prudential Regulation Authority’s prescribed amount, compared with 1.82 times a year earlier.

The reinsurance market continued to soften in the absence of natural perils, but costs increased slightly in the year as insurers restructured programs for new regulatory requirements under the Life and General Insurance Capital Standards.

KPMG says Australian insurers can do more to innovate on product offerings and enhancing customer experiences.

“We believe cyber-security insurance will grow as a product class, with more customers starting to pay attention to this aspect of their business and gain clarity on what they want to achieve from such a policy,” Mr Guse says.

“On the customer experience front, insurers are really only beginning to look at how they can better use their customer data to provide better service and drive efficiencies.”

Globally, many insurers struggle with decades-old infrastructure while coming to grips with potentially game-changing and disruptive technologies.

They face a complex technology crossroads without the confidence their decisions will reap desired benefits, KPMG says.

Market entrants may start with an advantage when it comes to effectively using data and technology to best serve their target markets.

In the past couple of years Australian insurers have enjoyed something of a reprieve on natural catastrophes, but they will need to be in good shape to weather the wider competitive challenges ahead.