Premiums are on an upward path, with the downtrodden commercial class expected to show improvement this year – but the latest JP Morgan Taylor Fry General Insurance Barometer makes clear it’s not the time to be popping champagne corks.

Australia experienced a relatively benign catastrophe environment last year, with claims well below the 10-year trailing average, even as global losses were slightly above trend.

That made a difference to overall industry profitability figures, with the combined operating ratio improving to 92% last year from 94% in 2015, according to the barometer.

But the headline ratio improvement masked an underlying deterioration, taking into account the relatively high impact on claims in 2015 from catastrophes such as cyclones, bushfires and hailstorms.

“If we look at what is happening at the coalface, there is a lot of competition, and this had led to underlying profitability decreasing [last year],” JP Morgan analyst Siddharth Parameswaran said.

The commercial combined operating ratio improved to 101% from 106%, reflecting significant gains in fire and industrial special risk, driven by lower catastrophes, plus reserve releases in public and product liability.

This was offset by deterioration in commercial motor and in directors’ and officers’ insurance.

One driver for an expected improvement in the cycle is that combined operating ratios are simply too high for the industry not to act on pricing. Despite the competitive market, no one wants to head over the cliff.

“In commercial insurance, [last year] was another year of downward pressure on rates – but profits in many classes are reaching unsustainably low levels, leading to the likelihood of a turn in rates [this year],” JP Morgan and Taylor Fry say.

The annual survey of underwriters and brokers points to a commercial premium rate rise of 2%. The rates declined 1% last year – better than the year-earlier forecast for a 3% drop.

In domestic classes premiums grew 3% last year, while the combined operating ratio improved marginally to 90% from 91%.

The survey highlights worsening claims inflation for domestic classes, increasing to 7% last year from 5% the year before. In home, claims inflation soared 12%, outpacing a 3% gain in premiums, while motor inflation grew 5% compared with rate gains of 3%. Premiums in home and motor are both expected to rise 4% this year.

Householder claims inflation is expected to ease to 6% this year amid an overall improving picture for personal classes relative to the consumer price index.

In compulsory third party (CTP), premiums in NSW are expected to rise 13% after a 10% gain last year as the State Government reforms the scheme, tackling a rise in claim numbers and concerns about fraud levels.

“NSW CTP experienced a 15.6% increase in underlying frequency, with improvement predicted from these levels [this year],” the barometer says.

Positive signs are emerging for insurers on the investment front.

Despite uncertainty caused by the election of US President Donald Trump and Britain’s decision to leave the European Union, financial markets have seen some strength in recent months.

Equity markets have rallied and global bond yields have improved, in a positive sign for conservatively invested insurance funds.

“Many in the markets are actually getting quite a bit more optimistic that we could see sustained increases for some time going forward,” Mr Parameswaran said.

“But we are coming from very, very low levels.”

Globally, commercial lines have been under pressure for the best part of a decade, and the amount of capital moving around the world competing for premium income shows no sign of easing.

Pressures arise from a relatively benign period for global catastrophes and the low interest rate environment, which has prompted investors to seek higher returns in the insurance sector, driving new supplies of alternative capacity.

“There was a thought that interest rate rises might lead to some of this capacity reducing, but that hasn’t been the case so far,” Mr Parameswaran said. “There is still capacity in the market, which is constraining a large increase, or a large turnaround in profitability.”

The barometer says competition, rates and capacity are cited by underwriters as key concerns confronting the industry, along with regulatory changes and compliance.

Among brokers, 83% cite staff issues such as training, retention and experience, followed by excess competition and capacity.

In the technology area, the industry is keeping an eye on developments in blockchain systems, driverless cars, use of Big Data and new classes such as Uber and Airbnb.

For the near term, the barometer suggests an improving picture for the industry this year, but responses from underwriters and brokers, combined with the global picture, suggest no sudden change in fortunes.

The industry is definitely not out of the doldrums yet. The champagne should stay in the fridge for the time being.