Tougher conditions for the Australian general insurance industry have been predicted for some time, but now it appears the peak profitability party really is over.

Actuarial consultant Finity’s last Pendulum report said insurers would benefit from an unexpected period of “extra time” for peak margins, thanks in part to lower reinsurance costs.

But according to this year’s report, compiled with Deutsche Bank, the final whistle has well and truly blown.

Negligible top-line growth and premium rate reductions will combine to compress underlying insurance trading result margins, and investment income outlook is also down.

Insurance trading result margins lifted from 14.6% in 2013 to 14.9% last year, in line with Finity’s predictions, but are expected to drop to 13.6% this year and 13.2% by 2017.

“Insurers are now swimming against a strong tide, which we believe will carry [returns on equity] back towards the long-term average of 11-12% compared with 15% over the past decade,” the report says.

Finity Principal and Pendulum co-author Andy Cohen told insuranceNEWS.com.au this comes as no surprise.

“About two years ago we started to predict the downturn in the industry,” he said. “[Last year] turned out, unexpectedly, to be another good year, but what we are seeing now is that fall in growth and margins that we were expecting to come through.”

Gross written premium (GWP) grew just 1% last year, with an outlook of 1.7% this year and 2.4% next.

Taking into account claims inflation, the real premium rate change is expected to be -2% this year, -1.6% next year and -1.5% in 2017.

Motor GWP, which accounts for about 22% of the total premium pool, stalled last year on 1% growth – the lowest rate for a decade. Home and contents fared a little better, but was still down on previous years.

Commercial lines are suffering too, with an abundance of capacity contributing to a soft market.

Finity believes a range of disruptive factors will ensure the low-growth environment in personal lines persists.

“Car-sharing is very small – but it might get big,” Mr Cohen said.

“Young people are owning cars less and less, telematics is reducing risk and driverless cars are looming in the medium term.

“On the home side, there is a slow trend of people owning less, plus a shift to units. There are a lot of trends that on their own might seem quite minor, but taken together will ensure a low-growth environment for some time.”

Despite the challenges, solid returns in personal lines are still driving strong competition and associated rate reductions.

Challenger brands have continued to take market share in home and motor, lifting 160 basis points to 8.9% and overtaking the major banks, which gained 20 basis points to 8%.

In comparison, the major insurers lost another 150 basis points in market share (now 58.5%).

However, Mr Cohen says the big brands are beginning to hit back.

“We are seeing the major insurers get pricing very close to challenger brands, which has not always been the case.

“This suggests a bit of fighting back from the likes of IAG and Suncorp.”

Finity believes the time is right for insurers to focus on claims, which represent the largest component of insurance spend – about 60-80% of premium.

The report says even small improvements can make a meaningful contribution to profitability. Finity expects claims transformation programs to re-enter the insurance vernacular.

“The top line is not growing and rates are not going to increase, which is why we say it is time for insurers to look at claims,” Mr Cohen said.

“The challenge is to do that without alienating the customer, but it can be done.”

While there are undoubtedly tougher times ahead, Finity says there is no need for panic.

“It is going to get tougher but it won’t be disastrous,” Mr Cohen said.

“We are coming off highs but are not looking at a complete collapse. Insurers will have to swim harder to get to the finish line, but we are not expecting mass drownings.”