Commercial premiums are set to keep rising this year and profitability is improving, but concerns about regulatory reactions in the wake of the Hayne royal commission continue to cast a shadow over the industry.

That’s the assessment of JP Morgan and Taylor Fry in their annual General Insurance Barometer report, which was released today.

They say rates have jumped 9% in the past 12 months and are expected to gain another 8% this year before the growth pace eases to 6% in 2020. The gains compare with a 1% decline in commercial classes in 2016.

Premium growth was significantly higher than claims size inflation in the past year as insurers sought to improve returns from underperforming classes, the report says.

JP Morgan insurance analyst Siddharth Parameswaran says the level of profitability and competition in commercial classes “continues to be a key issue confronting insurers and reinsurers. They have responded to this through premium rate increases.”

The combined operating ratio in the commercial classes improved to 96% last year from 103%, but fire and industrial special risk (ISR) and motor both remained in unprofitable territory.

Professional indemnity remains a problem area due to rising class action activity, which is expected to be further driven by outcomes from the Hayne royal commission.

“The cost of class actions in the directors’ and officers’ class, particularly relating to breaches around disclosure obligations for listed companies is approaching crisis levels,” Taylor Fry Principal and Senior Actuary Kevin Gomes said.

“This could create serious implications for a functioning economy if a significant increase in premiums creates difficulty for companies to obtain cover at an acceptable level.”

Profitability in domestic classes has improved over the past two years, particularly in compulsory third party insurance.

“There has been a slight downward trend in the domestic motor and householder ratios, indicating improved profitability in these classes, while the premium rates in domestic classes overall are forecast to remain broadly stable,” Mr Parameswaran said.

Underwriters, reinsurers and brokers surveyed for the report named regulation and compliance as the top issue facing the industry.

This year’s Barometer includes a review of likely impacts from the Hayne royal commission, which will deliver its final report to the Federal Government on Friday. Treasurer Josh Frydenberg will then release the document on Monday afternoon.

The inquiry is expected to recommend measures to boost transparency and regulatory oversight, while it has already indicated that a “buyer beware” approach is no longer suitable for financial institutions.

Mr Parameswaran says the royal commission’s case studies and adversarial process have elevated issues where regulators struggled to gain traction, and highlighted the need for financial firms to ensure products are in the best interests of customers.

Other outcomes could include a ban on conflicted remuneration in insurance, which would have a major impact on brokers.

“I think it is still very unclear where the royal commission will land on that,” he said.