Australia’s general insurance industry is on track to perform solidly over the next few years, S&P says in a new report issued today, citing hardening rates and an all-out efficiency drive as key factors that will support earnings growth.

These same factors are expected to also help the industry weather the temporary blip caused by last summer’s Townsville flood catastrophe and hailstorms in NSW and Queensland.

Underlying return on equity (ROE), which S&P uses as an indicator of profitability, is projected to exceed 10% over the medium term.

“We expect market growth prospects for the Australian property and casualty market to be moderate, with growth to benefit from some further rate hardening and supplemented by the return of unit growth,” the ratings agency says.

“Further rate hardening in commercial lines will be added to with moderate rate growth across home and contents and domestic motor reflecting claims costs. Claims have recently been affected by natural perils and higher repair costs.”

Insurers’ earnings have taken a hit from the Townsville floods and the hailstorms, with average ROE falling to 7% in the year to September, which is below the five-year average of 10.8%.

But S&P says insurers have in place effective risk management and appropriately structured reinsurance arrangements that should moderate the impact of future large claims and catastrophic events.

“On a net claims basis, the benefits from sound risk management and robust reinsurance arrangement become evident, while the certainty of reinsurance recoveries benefits from high quality counterparties,” the report says.

“In the main, property and casualty insurers operating in Australia have a well-diversified and high-quality panel of reinsurers participating in their program.”

From now to 2021, gross written premium in personal and commercial lines is projected to increase at a moderate pace on the back of incremental rate rises and stable unit growth.

Nominal direct premium growth, excluding mortgage insurance, grew 4.6% in the three years to September, according to the S&P report.