COVID-19 impacts totalling $1.3 billion contributed to the Australian general insurance industry last year experiencing its worst financial performance in more than two decades, consultancy Finity estimates.

A $300 million gross loss last year compared to a $3.9 billion profit in the previous 12 months, with lower investment returns and other issues also contributing to the poor outcome for direct insurers.

Lower investment returns contributed $1.6 billion to the overall slide, while catastrophe-related costs and issues in professional indemnity, public liability and compulsory third party, also accounted for a $1.3 billion impact, Finity CEO Scott Collings says in an article on the firm’s website.

Mr Collings says the year has put a hole in the industry balance sheet, but the impact is unevenly shared.

“At one extreme are pure play motor insurers who have actually done better than normal,” he says. “Commercial and diversified insurers on the other hand have all experienced varying degrees of pain.”

Those with significant business interruption exposures have the issue of significant residual uncertainty, while this year looks set to be a serious test in the commercial market of insurer pricing and underwriting sophistication and brand strength.

“Insurers now face a situation where large rate increases need to be pushed through to rebuild capital and to meet the higher cost of reinsurance,” Mr Collings says.

“But rate increases inevitably trigger higher levels of price shopping by policyholders and their brokers, creating elevated risks around retention and risk selection.”

Finity says roughly $3 billion in additional claims reserves for business interruption were set aside late in 2020 after a key court decision went against insurers.

A significant component of the losses is expected to be covered by reinsurance, leaving the industry with an estimated $1.6 billion net cost, but the amount remains highly uncertain given very few claims have settled.

Insurers also strengthened lenders mortgage insurance reserves by $300 million due to deteriorating employment conditions, while expenses generally likely increased $200 million due to the disruptive effect of the pandemic on operating models.

Domestic motor saw a $600 million underwriting result improvement due to reduced vehicle use, while commercial motor has seen a $200 million benefit.

The industry was also affected last year by natural catastrophes including bushfires, storms and hail, a surge in historical child abuse and worker-to-worker claims in public liability as well as impacts from class actions.