Times are changing for the insurance market in Australia.

At least, JP Morgan thinks so, after delivering a pessimistic outlook for this year that suggests insurers have reached the peak of the current profit cycle and margins will be flat.

“In terms of a place to put insurance capital, Australia is perhaps not as attractive as it has been in the past few years,” Senior Insurance Analyst Siddharth Parameswaran said in Sydney last week at the launch of the latest JP Morgan/Taylor Fry General Insurance Barometer.

“This is a different message to the one we have been giving for the past few years. Macro factors that are affecting the industry are quite a bit more uncertain now and the economic environment is potentially much more challenging.

“The message we were giving before was Australia was a great place to be in a global context. Some of that may be changing.”

Insurers face weaker growth prospects this year, the report says, including flat rates for commercial lines premiums and a slowdown in rate rises in domestic lines.

Increased competition, claims pressures and an expected slowdown across all premium rates will also constrain growth, it predicts.

Underlying insurance profits peaked last year after a light period for catastrophes in 2012, Mr Parameswaran says. “So unless insurers can get costs out in other areas and keep expenses down, we certainly would not be expecting profit margins on an underlying basis to rise [this year].”

Last year domestic lines premium rates increased 8% overall, driven mostly by householders.

Commercial lines rates are forecast to record no growth this year and next, a slight improvement on last year’s 1% decline.

Taylor Fry Senior Actuary Kevin Gomes says high capacity in the market is putting pressure on commercial insurance rates.

Combined operating ratios are expected to deteriorate slightly over the next couple of years, but will remain reasonably profitable, he says.

The 100%-plus combined ratios forecast for NSW compulsory third party, professional indemnity classes and workers’ compensation in Tasmania, NT and ACT “are of most concern”.

All other classes are expected to be moderately profitable in the next two years, Mr Gomes says.

When the combined ratio passes 100% insurers rely on investment income for profits. “Given we are in a low-investment environment, that’s not good.”

Reinsurance capacity has come “flooding back” after a benign year for catastrophes, Mr Gomes says. “That really pushed reinsurance rates down [last year] and the outlook is for further rate reductions in [this year and next].”

The emergence of alternative capital such as catastrophe bonds has also pushed down reinsurance rates.

The barometer features a survey on issues confronting underwriters. The increasing regulatory burden is rated the biggest concern (69% of respondents), followed by the competitive environment (38%).

For brokers, the main concerns are retaining staff (57%) and excessively competitive rates (43%).

An external issue facing insurers is possible compensation payouts following the royal commission on child sexual abuse.

JP Morgan warns it could lead to “substantial liabilities”: in Ireland there have been 15,296 such cases, with an average award of €62,895 ($95,643).

Similar inquiries in Queensland, WA and Tasmania prompted payments to 14,000 claimants at an average of $19,000 each, the report says.

Mr Parameswaran says the Federal Government’s financial services inquiry may examine the interaction between insurance and banks, given banks now own life insurers and considerable insurance space.

JP Morgan has no near-term concerns for insurance sector share prices, but in the long term, “the review could lead to significant changes of the landscape”.