Rising premiums and fewer catastrophes helped Australian general insurance industry earnings grow 61% last financial year – but rising profits have also lured new market entrants and again highlighted the issue of affordability.

Traditional insurers, also grappling with low investment returns and regulatory changes, are now confronting the toughest environment they have seen, according to KPMG Insurance Partner Scott Guse.

“When you look at their core underlying businesses, they are facing a lot of challenges, with increased competition primarily from non-traditional entrants,” he told insuranceNEWS.com.au.

Insurance earnings totalled $4.39 billion in the year to June 30, up from $2.73 billion in 2011/12, according to the KPMG General Insurance Survey 2013, which reports on Australian results from international and local operators.

Gross written premium increased 9.2% to $31.79 billion.

Mr Guse says premium growth could slow to about 3-4% this year and slide further in future years if Australia remains relatively disaster-free.

“If we have a good year – that is, no real catastrophic events – I would expect the competitive pressures in this market will start to create price deflation. So you will start to see some premiums dropping.”

Premiums climbed when a spate of natural disasters between 2010 and last year pushed insurers to recover higher reinsurance and natural peril costs.

Mr Guse says the growth of new personal insurance providers has some parallels with the reinsurance market, to which non-traditional capital has been drawn by attractive returns.

“You can link it to that sort of mentality or methodology. We are seeing a similar sort of competition in Australia.”

New entrants in Australia – such as Coles, Woolworths, Australia Post and Virgin – operate mainly in personal lines, particularly motor and home products.

“That is where it has really been the most lucrative for the insurance companies in recent years, because those classes have been the ones affected by the catastrophic events, and that is where the new challenges are arising from,” Mr Guse says.

KPMG says many insurers are working to address insurance affordability, providing cheaper rates through flexible excess options. But customers may still turn to new entrants.

Last financial year Cyclone Oswald was the only event to cost the insurance industry more than $100 million, according to the report.

So far this year conditions have been typically benign before the key risk months for cyclones, floods and bushfires.

The loss ratio fell to 63.7% in the year to June 30 from 74.2% in 2011/12, reflecting the dearth of natural catastrophes and insurers’ premium gains.

“That is a significant change to have in one year,” Mr Guse says.

As a result, and with expenses relatively flat, the combined ratio improved to 90.5% from 101%, according to the report.

KPMG says earnings have also been supported by increased premiums in long-tail classes, which include workers’ compensation and professional indemnity and which are more difficult for non-traditional players to enter.

Australian insurer share prices reflected the rising earnings, but with marked differences according to business and company profiles and relative positions at the start of the year.

Calliden increased 150%, IAG 53.2%, Suncorp 45.2% and QBE 13.2%, according to KPMG. Each continued to rise in the current year up to September 11.

Strong profit results have left a number of companies with plentiful capital.

“The question for these insurers is, what to do with the excess capital?” the KPMG report says. “Whatever they decide, the industry is well aware that the period of benign natural perils experienced in 2013 may not be repeated in 2014.”

Mr Guse says insurers need to be lean, efficient, innovative, agile and have a specific focus on customer needs to succeed in the current environment.

“Competitive pressures will see insurers that do not exhibit these traits falling behind the pack.”