Record profits for Australia’s top-shelf insurers are being bankrolled by reserve releases, which is a trend that won’t last, according to the latest industry snapshot by KPMG.

Australia’s top 10 insurers tabled an 11% increase in operating profit after tax to $3.95 billion in fiscal 2007, but the result was skewed by huge releases from long-tail liability lines, KPMG’s annual insurance survey says.

The report follows the release of profit announcements by IAG, QBE and Suncorp. IAG released nearly $200 million from its reserves in reporting a full-year net profit of $552 million. Suncorp’s record $1.06 billion profit was boosted by nearly $500 million in reserve releases.

Insurers weathered an estimated $1.5 billion in claims from the Queen’s Birthday storms in NSW – now the second most costly Australian natural disaster on record – while maintaining a strong return on equity of 16.7%, down slightly on the previous year.

Andries Terblanche, the author of KPMG’s annual insurance industry survey, says losses are likely to rise as catastrophic events increase in frequency.

“That said, insurers are better prepared and more mature in relation to these lumpish events,” he said.

Underwriting profit rose more than $500 million to top $2.5 billion, but Dr Terblanche warns that insurers are pumping up profit by releasing reserves originally intended to meet long-tail claims that never materialised following tort reform in 2002.

He says that as reserve releases decline in future years, insurers must return to commercial and compulsory third party (CTP) lines to bolster profit.

“The commercial classes and CTP benefitted the most from the tort reform that followed the HIH collapse,” Dr Terblanche said.

“The emerging recognition of the positive impact of tort reform on historical reserves is, however, now obscuring this softening market.”

The report shows prices on commercial lines remain depressed and will probably take another fall in fiscal 2008, but insurers will become more selective when choosing lines for price reductions.

Pricing for personal lines, the largest class in Australia, must be closely monitored as building costs soar.