Expectations of improved profitability for Australian insurance companies this year are likely to be dashed due to the bushfire and hailstorm catastrophes, the JP Morgan and Taylor Fry General Insurance Barometer says.

Survey data used for the report was collected before the worst of the catastrophic events this summer, but the actuary’s analysis includes an estimate of profitability impacts on lines including domestic and commercial property.

“They will be the most affected by the bushfires and the hailstorms,” Taylor Fry Principal and Senior Actuary Kevin Gomes told a briefing today. “That could add on an extra 15% to the combined ratios for those classes.”

The effect of the catastrophes on domestic and commercial motor combined operating ratios is estimated at 3%.

The gross estimates exclude reinsurance recoveries.

While premiums have increased, the industry faces more than $2 billion in disaster losses from recent events in a tougher-than-expected financial year.

The Insurance Barometer shows the overall domestic combined operating ratio improved significantly between 2016 and 2019, dropping from 90% to 83%.

Before the bushfire and hail catastrophes, the ratio was forecast at 84% this year, with motor expected to improve, home to remain static and compulsory third party to move backward to more normal levels.

For commercial classes, the combined operating ratio increased to 102% last year but is forecast to post a modest improvement to 100% this year, with some improvement in most classes.

“We note the industry is forecasting broadly stable combined operating ratios going forward into 2020, with some variation within classes and years,” the report says. “Those estimates are likely to be optimistic in our view, given the very recent bushfire and hailstorm experience.”

Strong rate increases are expected in most commercial lines as the recent trend continues, but gains in personal line will be limited by competitive pressures.

JP Morgan Insurance Analyst Siddharth Parameswaran says IAG and Suncorp will need to balance a desire to improve their personal line volumes with the risk of encouraging policyholders to turn elsewhere when they review budgets and pricing toward the middle of the year.

Climate change and natural perils ranked with regulation as the top industry issue for respondents this year, and the report also highlights a rising natural catastrophe losses trend.

Mr Parameswaran says insurers have benefitted in past years from reserve releases, made possible by over-estimations of claims. But that well, he says, is running dry.

“The industry has been able to absorb a lot of that increase in costs in natural catastrophes without showing a sharp reduction in profitability,” he said. “They are running out of those logs now to a large degree.”